Ticker: $VMEO
Share Price: $4.70
Market Cap: $780m
Enterprise Value: $480m
FDSO: 166m
Debuting the “quick pitch” format. This new series will offer concise, timely insights on relevant stocks. I will be kicking things off with Vimeo $VMEO.
Halfway through yesterday’s market session news broke around a potential acquisition of Vimeo by Bending Spoons, an Italian tech company that develops and acquires consumer facing apps. I had an open position in Vimeo already, bought just a few weeks ago, but decided to double up and add more shares at ~$4.85 (my total cost basis is in the low 4’s). Funny enough the shares actually traded down despite the takeover rumors and a brief stock halt.
Who even uses Vimeo anyway?
Vimeo is a unique video creation platform that operates on a SaaS model. The company provides a suite of products for video creation, collaboration, distribution, hosting, and analytics. Vimeo was spun off from parent company IAC in 2021 at a staggering $8.7 billion EV (>20x sales) and subsequently lost over 90% of its value.
Asides from burning a lot of investors along the way, critics love to point out that Vimeo has a weak product offering and no moat versus giants like Youtube. But Vimeo is somewhat differentiated through its agnostic distribution and synergistic relationship with other social media platforms.
While Vimeo may not be the best platform to build or reach widespread audiences it serves a niche in delivering add-free and fully branded experiences. Think of Vimeo as a unique tool to demo a product where you do not want your competitors products to show up as ads at the end of a video. Or a hosted video solution for a company that has an extensive employee training course it needs to routinely update.
Vimeo has recently introduced some AI-powered features including a script generator and teleprompter tool. Their video editor converts audio to text which makes the editing process much simpler for beginner to expert marketers.
Vimeo Core may be inflecting
Outside of the potential acquisition rumors I was already attracted to the Vimeo turnaround story and large margin of safety. The company has a pristine balance sheet with $300 million in cash or ~$1.80 per share.
Strategically, the company has shifted its focus in two key areas:
Pivoting into Enterprise sales → “Marketers using video to acquire customers, employees using video for internal communications and collaboration, and media businesses monetizing video directly with their customers”
Enterprise bookings grew +55% YoY
Vimeo core which equals Enterprise + Self-Serve (87% of total bookings) grew 3% YoY
Other bookings declined 25%
Transitioning from marketing-led to product-led
Sales and marketing expenses were down 11% YoY due to lower advertising spend
G&A expenses were down 54% YoY due to lower SBC
Despite 2023 sales dropping by 4% to $417 million, the business showed signs of stabilizing posting flat Q4 growth after 4 consecutive quarters of sales declines. Total bookings in Vimeo core (Self-Serve and Enterprise) actually grew 3%. As Other segment revenue continues to be deprecated it should be less of a drag on total bookings going forward. Based on significant cost cutting measures Vimeo posted $34m in adjusted EBITDA and $38m in FCF.
Quick thoughts on valuation
For a cash rich business with 78% gross margins and potential to inflect I think a 1.1x EV/Sales multiple is too cheap. Management guided for 2024 sales to be down between 8-4% but overall bookings trends (even though down) make me think this is sandbagged.
I expect adjusted EBITDA margin to expand another 200-300 bps to 11% in FY24 assuming further G&A and sales and marketing cuts, partially offset by higher R&D expenditure. 4Q23 adjusted EBITDA margin was 13% so I view this as achievable. Taking the top end of guidance I see ~$44 million adjusted EBITDA for 2024, implying an 11x multiple and 1.2x EV/Sales.
CVCResearch wrote a good pitch on VIC that goes into greater detail on the business and valuation that is worth checking out.
Potential acquisition
I have to admit I had no clue who Bending Spoons was before today. The company has gone on an acquisition spree over the past couple of years buying notable apps like Evernote in 2022 and Meetup in early 2024. They also recently acquired mobile app developer Mosaic in January from IAC, Vimeo’s former parent company. Other owned companies include photo and video editing apps Remini, Splice, and Filmic.
Bending Spoons is said to have laid off all existing staff from Evernote, Mosaic, and Filmic. In the case of Meetup, the company announced a $50 million investment, job cuts, and a relocation of its headquarters to Europe while reducing US staff. According to this TechCrunch article Bending Spoons recently raised $155 million of equity financing at a $2.55 billion valuation in order to acquire more companies. They reported sales of $350m in 2023 and have guided for $500m in 2024.
Based on this track record I can see why they would be interested in Vimeo:
Established connection to IAC through the Mosaic acquisition
Barry Diller (38%) and Joey Levin (2%) collectively control 40% of the voting power
The heavy lifting in terms of cost cutting has largely been completed at Vimeo
GAAP profitable and FCF positive in 2023
Large installed user base in a familiar category → video hosting and editing
Potential to further cut R&D spend of $107 million per year (26% of revenue)
While I think the synergies make sense I think judging by the numbers Vimeo may be too large of a target. It all depends on Bending Spoons’ ability to raise debt capital but the situation has gotten more interesting since my initial share purchase.
Compelling risk/return profile
I view the risk of a no-deal as minimal. Shares are up >30% since the company’s 4Q earnings release on February 22nd. I interpret this as the market believing, at least partially, in the turnaround story.
In a worst case scenario Vimeo trades down to 0.5x EV/Sales or $3.05, representing 35% downside. At that level 60% of the market cap would be covered by cash.
On the other hand, say a deal gets done over the coming weeks. A 2.0x EV/Sales multiple or $6.83 SP would represent 45% upside. A still reasonable 2.5x EV/Sales multiple or $8.10 SP would mean 72% upside. Overall I like the risk asymmetry while the downside seems well protected by cash and positive FCF generation in 2024.