Vimeo, Inc. (NASDAQ:VMEO) Q4 2022 Earnings Call Transcript

Vimeo, Inc. (NASDAQ:VMEO) Q4 2022 Earnings Call Transcript March 3, 2023

Operator: Good morning, and thank you for joining Vimeo’s fourth quarter earnings live Q&A. We’re excited to be here with you on video. Before we begin, a few comments. First, this session will be recorded and available on the Vimeo Investor Relations site later today. Second, we will discuss Vimeo’s outlook and future performance. These forward-looking statements typically may be preceded by words such as we expect, we believe, we anticipate or similar such statements. These forward-looking views are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. We’ve also provided information regarding certain key metrics and our non-GAAP financial measures, including certain forward-looking measures.

These should be considered in addition to and not as a substitute for or in isolation from GAAP measures. Additional information regarding Vimeo’s financial performance, including reconciliations with comparable GAAP measures, can be found in our earnings release and Vimeo’s filings with the SEC as well as in supplemental information posted on the Investor Relations section of our website. With that, I’ll turn it over to our CEO, Anjali.

Anjali Sud : Hi, folks, and welcome to our fourth quarter Q&A. Last night, we published an interactive shareholder video that walks through our results and outlook. Once again, we use Vimeo’s product to make our update fully interactive. We know it’s earnings season and your time is precious, so you can click and navigate through the content instead of watching it linearly or just reading the transcript. We, of course, hope that this helps to demonstrate how video can make important communications more engaging and easier to consume. So I’d like to highlight 3 things before we take your questions. First, we have great momentum in Vimeo Enterprise. Last quarter, bookings were up 59% year-over-year. Net revenue retention was again above 100%, and customer usage is looking very strong.

We see Vimeo Enterprise as a big growth driver still in its early days. In under 4 years, we’ve built a business with a $65 million run rate in bookings that’s growing faster than the rest of the market. So we’ll lean into this momentum in 2023 with our investments. Second, we believe that by simplifying our product and focusing on the fundamentals, we can get self-serve back to growth on a more normalized trajectory than the past few years. Our line of sight here is getting clearer as we get past the COVID cohorts, and we expect far more visibility over the next few quarters. And third, we’re getting more efficient. This is our second straight quarter of positive adjusted EBITDA and free cash flow, and we entered 2023 with the flexibility to invest in growth while continuing to improve margins.

This is a choice that we will keep assessing as we move through the year based on our results with the commitment to profitability in any growth scenario. So with that, let’s jump into questions.

Q&A Session

Operator: Our first question comes from Tom Champion at Piper Sandler.

Thomas Champion : Hopefully, you can hear me. Two for me, please. Anjali, maybe on the self-serve side, given the outsized customer growth of 2020 and ’21, help us understand the retention characteristics of these cohorts and kind of where we are through that process of anniversarying. And what does the path forward look like to get those cohorts back to stability and return the self-serve segment to revenue growth? And then, Gillian, maybe one for you. We like the EBITDA guide for the full year. Curious if you could talk about the range of macroeconomic scenarios you’re envisioning. And then balancing that, what are the key investments Vimeo needs to make in order to drive product growth?

Anjali Sud : Sure. So look, on self-serve, we very much believe that there are good reasons to get that business back to growth. We were growing well pre-pandemic. And as you said, Tom, we have these quite large cohorts that are 3x larger than pre-pandemic that came in over the last few years. And they are retaining somewhat worse than what we’ve seen in the past, and that’s largely because of the nature of those cohorts, but also because we’ve diversified our use cases. In the last few years, we have gone from really being a pure-play hosting-only platform to offering our customers many different things. And so why we have a lot of confidence in our ability to grow is because when we look at the fundamentals, what we’re seeing is the tailwinds for video are there.

We have a great product that solves our customers’ needs, particularly in the two use cases of marketing and communications. And we think that there — we have clear levers between making our UX more simple, improving our website and our pricing, and getting better at marketing to these customers that have these use cases. We think we have the ingredients to really return self-serve back to growth. That, coupled with coming out of the, sort of, just the time that — as we come out of the pandemic, sort of gives us a sense that we have both the sort of natural subscription economics are moving in our favor, and that we can execute with the right growth levers. So that’s kind of what I’d say there. And I’m sure, Gillian can break that down more.

Gillian Munson : Yes. So Tom, I think the thing I’d like to remember about self-serve is it is a classic subscription business, okay? And in classic subscription businesses, your first year and second year are the biggest deltas in retention, almost no matter what the product. And then you get out to 3 and beyond, and that starts to really be much more negligible in terms of the delta. So when you look at what we had in 2020 and ’21 as a function of largely the pandemic, but also some of the trial work we did, you’ve got 2 years of pretty large cohorts on new. By the time we get to the end of ’23 and into ’24, those folks will all be in 3 years plus and have a much lower swing factor on the business. And when we look at new itself, underneath it all, we see new as about a mid-teens grower.

And so when you put it all together, you get the company back to a place where it’s more traditional where new is running in the 20-some-odd percent of your bookings and then renewal is the rest. So I think that in any event, these cohorts that we had in 2020 and 2021 were going to have an outsized impact on the business, and we’re seeing that. They were fairly unprecedented. And we’re going to beat to the tail end of where those folks — the folks that are staying with us are going to stay with us pretty sustainably over the longer haul. Underneath that, and Anjali mentioned this, but I think it’s really important to note, we see metrics in the business that point to that sort of mid-teens organic growth, paid MAUs, uploads. And as Anjali mentioned, the sources of those uploads is spreading out amongst our products.

So uploads are up in the mid-teens, and now they’re from almost 0 to 40% from all the new different products we’ve added to the mix. So we feel good that underneath it all, there is a growth business there and that the last couple of years have been very clouded by those two cohorts. So that’s the self-serve business. And that’s why we fundamentally believe that it’s a growth business and that when we kind of get through there, you’re going to really start to see it in the numbers. You also asked about EBITDA. We are committed to being a profitable business. We think it’s really important. We’ve said many, many times the stability of our business and its balance sheet is important to us. And we really think as we work through this period we are in, having a stable balance sheet and putting more cash on the books is an important thing to do.

We have been in a challenged top line environment for a while. So there’s nothing super new in terms of macro sentiment in there given that we’re already sort of dealing with those transitions. And then your last question was key investments to drive profitability. We, as part of our 2023 planning, which really led us to the guidance we gave, decided to make some key choices. And that, in the interest of being a profitable growth business, which we think over the long haul is really our best way to create value, we are really conservatively investing in Vimeo Enterprise and getting self-serve back to growth and are — have made choices to not invest in other less strategic areas.

Operator: Our next question comes from Brian Fitzgerald at Wells Fargo.

Brian Fitzgerald : A couple I wanted to drill down on and maybe even follow-ups. Wonder if you could talk to on self-serve, any trends you’re seeing at the top of the funnel, a bit more about the opportunity around free-to-pay conversion, where you are today, maybe in relative terms versus best-in-class players? We read this in the letter. And any structural inhibitors to free-to-pay conversion versus other players in the market? And then maybe if you can talk about the playbook? How quickly you think you can narrow any gaps there?

Anjali Sud : Brian, I think on the — your last question, you broke up a little there. Do you mind repeating it for us?

Brian Fitzgerald : In the — are there any structural inhibitors in free-to-pay conversion versus other players in the market? And what’s your playbook, if there are, to closing that gap on free-to-pay conversion?

Anjali Sud : Got it. Yes. So in terms of top-of-funnel trends, I think we’ve shared that, in 2022, we did get hit with a pretty meaningful decline at top-of-funnel demand around 30%, which obviously impacted our results last year and then flow through to revenue in 2023. We are seeing very early signs that, that may be getting better, still declining, but at a lower rate. And regardless, our strategy and plan for execution in 2023 doesn’t require us to see a material change in top of funnel. The reason is that there is enough demand where we believe that we can do a better job of bringing in qualified users. So these are businesses who are looking to use video either for marketing or internal communications, that the sort of addressable market of those folks and how to reach them is large enough that we can funnel less marketing dollars in a more efficient way to bringing and attracting those customers.

And then we think we have the ability to improve conversion, both free-to-pay conversions, so better converting our free users who are giving us a signal that they should be getting value from our tools, as well as even just other traffic hitting the site, how can we better convert them. And the way that we’ll look to do that is our website and optimizing our website and then our pricing and our packaging which, as you know, we have been working through. We’ve moved to a per-seat pricing model, which we think is the right one for Vimeo. And we see a lot of opportunity right now to test and optimize that model to drive improved conversion. To the question of sort of best-in-class. I think generally, you can look at what other SaaS companies have done.

There’s no structural reason why we can’t do those things. But just even forgetting that and putting that aside, if you go to the Vimeo website, we have a very broad set of capabilities that serve a very broad set of users. And one of the things we think is entirely in our control and is in line with our strategy of simplification is we think our products can do a better job of exposing what you can do on Vimeo. And we think we can provide a more targeted, focused experience for the right customers. So I think what you’re really seeing is sort of that. As part of a mix shift in Vimeo is sort of a natural sort of focusing on who’s our highest value customer, let’s make sure our pricing, our website, our product experience really speaks to those customers.

And it’s pretty basic blocking and tackling, but we have a new Chief Product Officer and a new Chief Marketing Officer, both of whom have done this many times. They are now 6 months in, and they’re the ones really leading this initiative. And I think they have a lot of confidence that, just by blocking and tackling on the fundamentals, we should be able to move the needle.

Operator: Our next question will come from Brent Thill at Jefferies.

Brent Thill : Just on the enterprise opportunity, I know you mentioned it’s around 10% of revenue, 15% of bookings. Maybe just paint a picture of the long-term aspiration. Anjali, where do you think the business can be? And maybe just walk through kind of what are the remaining roadblocks that you need to get around for that business to really create the cadence and the predictability that you’d like to see?

Anjali Sud : So I believe that the opportunity is pretty massive for Vimeo Enterprise. Every company, every team, every organization and every workforce in the world should be using video more than they are today. And I think the tailwinds are clear, certainly in our numbers. But just more broadly, if you look at what’s happening around us, we have a new generation coming and entering the workforce. They are digitally native. They’re spending their personal lives on TikTok. Attention spans are getting shorter. And I think if you just take a step back, do we envision a future where we’re going to train employees using documentation and manuals? Or are they going to use an interactive video? Are we going — are marketing teams going to have to figure out how to create really compelling video content at scale every day?

We really see that opportunity. And so our goal is every company, every workforce is using Vimeo to communicate better at work using the power of video. Obviously, we have good momentum now. We’re not there yet. But I think the good news is that from a product perspective, we put a lot of investment in the last few years in expanding our product suite. We do think we have a pretty strong product suite that is winning relative to others in the market today. It’s one of the broadest suites. It has a good mix of helping companies do what they need to do right now while also being innovative and thinking about the future. And we’re seeing that resonate with some of the largest companies in the world. So when I think about what we need to do now, it really is, I think, getting good at marketing and selling this product, increasing awareness so we’re in the consideration set.

To this day, we still often are not in RFPs from some of the largest companies because they don’t know and think of Vimeo as an enterprise solution. And then we absolutely need to get efficient and better at every sale, and generating pipeline, converting pipeline, all of your classic go-to-market enterprise SaaS muscles. I think we’ve made really good progress there, but there’s still work to do. And then just the very last piece I’d say is we did roll out a per-seat pricing model last year in Vimeo Enterprise that is resonating. But one of the things it does really well is it aligns our customer success with how we charge. And so ultimately, what we have to do is get really, really good at making our customers successful, helping them realize the ROI from video, helping them track and measure that ROI and ultimately then monetizing that value.

And those, again, sounds like fundamentals, but I think that’s where we are. We’re executing on the fundamentals. We have all the ingredients for success, and I think Vimeo Enterprise can be a very large, exciting business.

Gillian Munson : Yes. And I’ll just add a couple of quick details. We mentioned in the call or the video rather, that we had our best win rate in Q4 in this business. As you know, we’ve revamped our sales force in 2022 and really started to see that momentum build in terms of productivity, win rate, et cetera, as we ended the year. The second piece, and one of our favorite parts about our business model, is that self-serve continues to be the hunting ground for Vimeo Enterprise in a meaningful way. In the — for the year and for the quarter, it was more than half of the leads that came in for that business came through our self-serve business. We continue to believe that self-serve is a very important piece of our — of the puzzle of how you build this overall growth story.

Operator: Our next question will come from Justin Patterson at KeyBanc.

Justin Patterson : Great. Anjali, I’d like to go back to just kind of your theme for the year, innovation through simplicity. I know a lot of us have often thought of Vimeo as being much simpler, easier to use than a lot competitors. Just kind of talk through just what you see as the opportunity to simplify the Vimeo platform today? Are there some discoverability issues with the product? Are people just not realizing the full value of the platform? And then, Gillian, perhaps you could tack on to that, how you think of that influencing conversion rate over time?

Anjali Sud : So I think Vimeo has always been, and what we do exceptionally well, is we make video easy and intuitive. We make really complex types of video far more accessible. That’s always been our strength, and it continues to be our strength. Where I see an opportunity is, in the last few years, we have dramatically expanded what you can do on Vimeo. So for the first 10-plus years of our history, once you had a video, you could upload and host that video and embed it using Vimeo. We are still best in class at that, and we’ll continue to advance to make sure we stay that way. But now you can live stream an event on Vimeo. You can create a video. You can record a message. And then after you created that video, the things that you want to be able to do have changed and have evolved.

And we have expanded our product pretty dramatically. And so I think the reality is that right now, it is too hard to discover the full breadth of what you can do on Vimeo today. And the way to solve that is much easier once you’ve already built the capabilities. We have all of the products in our suite. We need our UX. And the way you get into the product to be frictionless and to be sort of viral in its ability to help you discover what you can do. And some of that is just truly removing steps in the process, like true simplification. Some of it is actually just being smarter in our data, using AI, to be able to say, okay, we know what kind of a user you are. What’s the next best action? What’s the next thing we’re going to service? So those are the types of opportunities we are laser focused on this year.

And we think there’s a lot of very sort of near-term improvements that we can drive without a significant amount of investment. We’re not saying we need to go and launch whole net new capabilities. We’re really saying like we’ve built a lot of power under the hood and it’s time to expose that power in a more simple way. And I will just say that doesn’t mean we won’t also look to innovate in certain areas, but innovation through simplicity, the reality is we know every customer we talk to still finds video too hard, every single one. You can be a market — a marketing department of the largest company in the world with the largest budget, you can be someone who has been in the video business and creating video for 20 years, and you will still say it’s way, way too hard.

So we think that this sort of simplicity really is the way to open up video for the world.

Gillian Munson : And from a financial perspective, we — our view is that we need to be building a growth — a profitable growth business, right? So we need to have efficiency in our marketing dollars. Conversion is a huge piece of that. But it’s also a huge piece of adoption. I like to joke that IR is going to become a profit center at Vimeo. And we’re already on our way. I can tell you. We have customers that have come in because of our video. Now we get a little aid in that from time to time. We have some special helpers who help us make sure we can use the product right. I want every CFO to be able to do a video of their earnings from their home if they need to or want to. And I think that’s the kind of thing that feeds into conversion.

And to build a profitable growth business, we want that conversion to continue to grow. Now just as a reminder, our conversion, we’ve talked about this in the past, it is down from the pandemic, but up meaningfully from pre-pandemic periods. That’s all about gaining the efficiency we want to gain to lead us to the point where we can drive the kind of EBITDA margins we think the company deserves.

Operator: Our next question will come from William Kerr at Cowen.

William Kerr : Great. I had two quick ones. So stock-based comp stepped down nicely in 4Q. Are there any onetime callouts there? And then could you just talk about your philosophy around stock-based compensation and how investors should be thinking about that going forward? And then I have one other one.

Gillian Munson : Sure. Thanks, Bill. So stock-based comp has been running in and around $20 million a quarter. And in Q4, it was meaningfully lower. That’s the result of some exiting executives, where we’ve had to true up the stock-based comp for those grants. So there’s a little bit — a lot of Q4, and I think we outlined it in the prepared remarks, that is onetime in nature for that true-up, if you will. But that said, I think there’s a more important point on stock-based comp because stock-based comp ultimately reflects burn rate and dilution to our shareholders. And Vimeo, in 2022, had a bit of an unprecedented set of circumstances. The stock came down a lot. We were continuing to hire. We brought on a whole new management team.

As we look at 2023 and beyond, we are very committed to limiting dilution to shareholders, and that’s going to have a resulting impact on stock-based comp. So $20 million has been in and around where we are. I think that’s sort of peak level, and that will start to come down over time at the company. One other note on dilution just generally, and we mentioned this in the video, but we have gone to net settle on when our employees’ shares vest for tax purposes, which is, in a way, its own a buyback of sorts in the company. So again, very, very focused on dilution. It will show through in stock-based comp over time.

William Kerr : Okay. Great. And then one more. Anjali, so there’s been a lot of talk about AI and generative AI lately. And I was just hoping you could tell us a little bit about how Vimeo is using AI and how you think it might potentially impact the business over the long term.

Anjali Sud : Sure. Well, I think like everyone, there’s a ton of exciting opportunity in AI. But AI isn’t a new thing for Vimeo. We’ve been very intentionally investing in AI over the last few years. I think we’ve built one of the strongest video AI teams, certainly in our industry over the last few years. And we do use AI in very tangible ways today. We use AI to optimize video delivery so that it can be scalable, efficient and high quality. We use AI to help customers create content, so you can use our mobile app and provide us with some images or video footage, and we will use AI to automatically create a video for you that you can then edit. And we do things now increasingly to help automatically sort of optimize content that comes through our system.

So an example would be, if you are — you had a 3-hour meeting, and it’s now automatically being recorded and archived on Vimeo, we will now use AI for enterprise customers, for example, to automatically suggest ways to chapter that content based on the information. So those are some of the ways today that we use AI. And it’s really all designed to like how can we help you create content faster quality that’s better quality? How can we help you get more from the information that’s contained within a video? And then obviously, how can we help Vimeo operate in a better way? On the topic of generative AI. Certainly, that’s an area we’re looking at, and we believe we’re well positioned to play a role in and leverage for the benefit of our customers.

One of the things that I think is really interesting is we do have one of the largest data sets in the world on video. Our embeddable player is out on the Internet. I think after YouTube, there is no other player that has as much video content. And so we think that we have some interesting assets and opportunities to be able to play a really valuable role in the sort of ecosystem around generative AI. Certainly, it’s early in video, but it’s not that early, and we’re taking a pretty proactive approach as we think about that.

Operator: Next question will come from Danny Pfeiffer at JPMorgan.

Daniel Pfeiffer : I’m on the call for Cory Carpenter. I just have a few quick ones. On trends, more broadly, in international markets, are you seeing any differences in the growth rates versus domestically? And then on the second question, you talked about one of the big use cases for Vimeo Enterprise being for marketing departments. And I was just wondering if you’re seeing any slowdown there on customer acquisition or higher churn among those customers given the slowdown in marketing spend across the industry?

Gillian Munson : Thanks, Danny. Just — I’ll hit the international growth first. Our U.S. business grew faster than international markets, but not by a meaningful amount in the quarter. So that’s where that sits. And we talked a little bit about currency’s impact on — or FX’s impact on the financials, they would have been slightly better without that FX headwind.

Anjali Sud : And then just to add on the global side. The need for video is global. We continue to see demand across countries and regions. Certainly, for Vimeo Enterprise, we see an opportunity to expand internationally and our — we had planted a flag in EMEA and APAC, and we’re seeing really exciting growth there, and we think we’re just getting started as it relates to international expansion of our sales force. On the question about marketing departments, it’s interesting. We haven’t seen any slowdown in demand for marketing departments given the need for folks to get more efficient. The hypothesis that we would have, based on what we see is there’s actually a greater demand for every marketing dollar to be — to have an ROI.

And if video has higher clicks, higher engagements, is a better tool to acquire your customers, then actually the need becomes more valuable. Where it’s tricky is if your value proposition and your price point isn’t compelling. And we think we have the best value for money in the industry, right? And we’ve moved to a per-seat pricing model. We really have kind of taken the approach of, let’s make it easy to start using video. You can start as a marketer on Vimeo for free. You can pay a couple of hundred dollars and start to realize the benefit of our tools. And then over time, based on your usage and what you’re doing, we can turn that into a really meaningful relationship with you. And so we think that approach that we’ve taken is actually quite aligned with sort of macro desire to be more efficient.

One last thing I want to add is the other thing that we’ve certainly seen more momentum in the last couple of months has been one of the things we do is we can help consolidate multiple different video vendors because of the breadth of our solutions. And that can often be a way to save money. And we are seeing that sort of sale resonate with companies more and more. And we’re sort of developing a tighter pitch around that and offering around that. But I think for both of those reasons, we are actually well positioned to be sort of a net benefit that many companies can embrace right now to be more efficient during this time.

Operator: And with that, it looks like there are no further questions. I would like to hand the call back to Anjali.

Anjali Sud : Great. Well, I’ll wrap I think something that I think is important for you all to know. The Vimeo team is pumped. Despite challenges and tough choices of late, we kicked off the year genuinely energized, and for two reasons: Because the tailwinds for video are strong, and we think we’ve got the best product for businesses to use video; and because our strategy is to simplify, simplify our products to make it easier for our customers, and simplify our business to make it easier for ourselves. Simplification is, I think, a powerful force and function for focus and efficiency. And we feel like we have the right tools to execute and delight our customers this year. So thank you for your time, and we’ll wrap by playing some quick footage from our company kickoff last month.