Category: Featured

In-depth analysis or commentary on companies, securities, or the economy

More Signs of the Bullwhip Effect (part 2)

Reading Time: 4 minutes

I wrote a post at the beginning of the year that the bullwhip effect was what kept me up at night. It actually was one of my most-read posts thanks to a bump from Andrew Walker (thank you sir, if you are reading). To summarize, it was a fear that while everyone else is focused on inflation, I was thinking about the after effects of a bullwhip. That is, on the way up, customers tend to see strong demand, prices are going up, and they realize they don’t want to be caught short and also want to get ahead of price increases, so they pre-buy.

Once demand tops out or reaches a tipping point, prices start to fall, customers say, “eh, I’ll just wait to buy when it is cheaper” and it is a destocking downcycle. It isn’t quite intuitive because sometimes  prices of inputs can really overshoot to the downside yet buyers are still reluctant to step in. But that is the point. The bullwhip overshoots on the way up and down.

With COVID, I think we saw this on steroids. Where customers saw strong demand, cost increases, but also supply chain challenges that made them consider having safety stocks. You can imagine why I have a fear of this upcycle-on-steroids turning into a down-cycle-on-steroids. Anything with steroids isn’t good, except for professional baseball, football…


I won’t rehash Target or Wal-Mart‘s earnings, or Bed, Bad & Beyond, which all seem to be experiencing excessive inventory in some fashion. In the latter case it completely sapped their liquidity. This could be true of Big Lots as well, we shall see but the tea leaves are not good.

But now, we have chip companies – center of the storm for supply chain challenges – calling out the bullwhip. Nvidia, which is a top 10 S&P500 company, recently came out and said,

Second quarter results are expected to include approximately $1.32 billion of charges, primarily for inventory and related reserves, based on revised expectations of future demand.
“Our gaming product sell-through projections declined significantly as the quarter progressed,” said Jensen Huang, founder and CEO of NVIDIA. “As we expect the macroeconomic conditions affecting sell-through to continue, we took actions with our Gaming partners to adjust channel prices and inventory.

Not only did they get demand completely wrong, they actually are taking an impairment charge on inventory! That is quite a change from 2021.

Here is Micron as well. They don’t just describe the bullwhip, they talk about its financial impact (demand down, but they also need to throttle back production. Doing so leads to bad decremental margins).

But they aren’t the only ones. Check out what Armstrong (a ceilings company) said about what they are seeing. I think they describe the bullwhip effect beautifully! I know it is a lot of text, but at least read the second half.

Low and behold, many other building products companies are reporting similar impacts. Here is Trex, a composite decking company, which typically viewed as a compounder, long reinvestment runway company (but also decking benefitted from the home being a sanctuary).

Their competitor Azek also mentioned similar things.

Here is Ryerson, a metal distributor:

And here is Stanley Black & Decker


So you get the point. There has been a swift change in what companies have seen and we look to have a destocking cycle on our hands. The last time we saw this was around 2015-2016, when there were similar fears of a recession, prices were correcting lower, inventory was fine so it was a perpetual down cycle.

It didn’t last long though. But you can probably guess why I was recommending municipal bonds a month ago when the 10 year treasury got to 3.5%. My bet was we actually have a disinflation problem coming, and that is starting to prove itself.

My advice would be to continue to avoid things with too-good-to-be true “demand.” Especially those that experienced strong bumps during COVID. That seems like it could unravel quite quickly. On the positive side though, I think the Fed will accomplish its goal on tamping down inflation! At least on the goods side.

Bed, Bath & BeBOND? (part 2)

Reading Time: 3 minutes

We all knew it was going to be bad, but it was worse. Bed, Bath & Beyond’s earnings were terrible, their cash got sucked up, and the CEO is out. The CEO’s credibility was already toast, but I want to pile on: their share buybacks might go down as some of the worst timed in history. Their investor day targets were laughable and I feel sorry for anyone who believed them. They also might be the fastest “great liquidity situation doing ill timed buybacks” to bankruptcy I have seen in awhile.

In my last Bed, Bath and BeyBOND post  I said,

I calculate LTM EBITDA of $190mm as the turnaround plan ran up against snarled supply-chains. Now we have changing consumer trends, which Target called out. So expectations are just $51MM in EBITDA for FY’22 (ended Feb ’23) and then going to $260MM in ’23.

This all sounds pretty bad compared to their investor day goals of $950MM. Management credibility is bad. And with everything else going on, I’m not sure many have appetite to invest in retail right now.

So we knew it would be bad, but it was Bed, Bath & BeREALLyBAD. EBITDA was negative $225MM. Woof. Expectations were negative $85MM.

As a result, their liquidity got zapped pretty quickly and they burned almost $500MM of cash. Good thing they were still buying back stock this quarter (what a clown show).

As a result, the bonds have cratered. In my last post, I mentioned I was interested in the 2034s at 50 cents. However, since that post the 2024s cratered from about 75 cents on the dollar at the beginning of June 2022 to 42 cents.

Ok – call me crazy, but I am taking a small flier on the 2024’s. The company is clearly in a distress scenario, but they also still have $900MM of liquidity. We could still see a fire sale of BuyBuyBaby (a big if), but there is value here to someone to loan-to-own, in my view.

BBBY still has $1.1bn of book value of real estate and $258MM of net working capital. I think they will start to sell down their $1.7BN of inventory over this year to generate cash and get over the 2024 maturity wall and they have room for mark downs of inventory to generate cash.

On the flip side, they still have $1.4BN of debt, but about $1.2BN of it is trading for less than 50 cents on the dollar!  So $1.3BN of real estate and NWC vs. $600MM of market value of debt (it is actually less) and $200MM of ABL. That leaves a gap of about $500MM to work with.

My pre-mortem expectation is they try to do a distressed exchange with the 2024s. They may generate enough liquidity to tender a portion of them (it is less than $150mm market value today – theoretically could use the ABL). My guess is liquidity worsens further next Q before they start to see some inflows from working capital.

One thing I know for sure – expect some coupons in the mail soon!

Bed, Bath and BeBOND? $BBBY

Reading Time: 4 minutes

Full disclosure, I hate shopping at Bed, Bath and Beyond. It makes me angry. That has prevented me from actually acting on this investment. But I wanted to present it to others who may find it interesting and one I may act on:

At 54 cents on the dollar, BBBY bonds yield 12.3% to maturity. If they can do the bare minimum turning the biz around, or sell an asset like BuyBuyBaby, it is a much higher IRR. If they ever hit the goal from their 2020 investor day, it’s a home run (but low odds). But I also do think there’s a decent chance they don’t do any share repos near term and buy back discounted debt instead.


What’s the situation?

I highly encourage people to read Andrew Walker’s post on BBBY, which opened my eyes to (i) how much cash they have and (ii) the opportunity to improve earnings. He’s also opened my eyes to how much cash they’ve squandered…

Long story short (which is a story I probably should have shorted), BBBY had an investor day in 2020 and said they thought they could go from ~$450MM of EBITDA at the time to $950MM by 2023! Woa!

The way 2022 is going, there is no f*cking way there are getting there. Retail has been hard enough. With BBBY, you’ve got a turn around story, too.

And lo and behold – their guide was horrible for ’22.

I calculate LTM EBITDA of $190mm as the turnaround plan ran up against snarled supply-chains. Now we have changing consumer trends, which Target called out. So expectations are just $51MM in EBITDA for FY’22 (ended Feb ’23) and then going to $260MM in ’23.

This all sounds pretty bad compared to their investor day goals of $950MM. Management credibility is bad. And with everything else going on, I’m not sure many have appetite to invest in retail right now.

But I am always looking for a way to make money in nasty situations that no one wants to touch. Is there a place where maybe you can take a downside-protected position with solid return baked in and also some upside if things do go right?

I’d look at the bonds….

via GIPHY

BBBY 2034 bonds are trading at 54 cents on the dollar! Woo wee. And that foots to a ~930bps spread to treasuries and 12.3% YTM. And yes, these are registered (not 144a), so normal everyday joes can buy them (not investment advice lol).

How does the cap structure look?

With cash of $440mm and total debt of $1.2bn, I see total and net leverage of 6.2x and 3.9x, respectively. Total liquidity sits at $1.4bn.

I use the LTM EBITDA basically to acknowledge there are 1x factors in ’22 that I don’t think will crimp profitability in the future. I already mentioned $260MM is FY’23 estimate, that probably goes lower honestly,  but I think $190MM actually isn’t a terrible mix between the next couple of years estimates. The market is forward looking after all

However, like I said, the BBBY bonds are at steep discounts to par. They have plenty of liquidity to take out the ’24s. Then its just the 2034s and 2044s – they have bought these back in the open market in the past!

Last but not least, they are currently marketing BuyBuyBaby, which actually grew comp sales in the latest Q (BBBY was -15%). I think equity holders are looking at a potential resumption of terribly timed buybacks like they’ve done historically, but I wonder if they buy back bonds. This would create equity value in itself, take BK risk off the table, and be at attractive IRRs.

You Don’t Have to Hold to Maturity

Let’s say they take-out the ’24s, which I think is a given. They turnaround the business somewhat and by Aug-2025, the market ascribes a 650bps spread (I think this is pretty conservative – single Bs right now have a spread of 480bps). That foots to an 18.5% IRR in the bonds!

If you are a real bull, you might look at those 2044s at 43 cents on the dollar instead!


My calls thus far on retail with BIG and BBWI have been terrible. So go at it with your own risk!

Service Properties Trust – A Special Situation with a Catalyst $SVC

Reading Time: 6 minutes

Quick idea today: I am looking at Service Properties Trust (SVC). I think the idea is interesting and there is a catalyst. Here’s the situation:

  • Company Overview: SVC is an externally managed REIT (managed by RMR – more on this later), owning 304 hotels and nearly 800 “service-oriented properties” which are net lease
  • Glance at the Opportunity:
    • $1.4BN market cap, $913MM in cash*, $7.14BN in Debt = $7.7BN EV
    • Tangible book $10.62 vs. stock at $8.61 = 19% discount to book value
      • Book value likely underestimates the net lease portfolio value
      • Book value is also depreciated – i.e. the assets bought many years ago likely didn’t go down in price from the price paid, but accounting is accounting. Depreciation is $3.5BN of value – think about that in the context of the market cap.
      • See Value Build table below. You could arrive at $40 implied stock price depending on what you want to believe. I used 7% cap rate for the net lease portfolio which is a decent discount to a recent comp.
    • You can also get to ~$12 stock using 12x EBITDA, which is 37% upside, and ignores a lot of other things I’ll mention. True value likely is somewhere in between these data points.
    • The cap structure is overlevered, they have a $500MM of bonds due Aug 2022 and the $1BN revolver is technically due as well.
      • *They have $1BN drawn on revolver. The rest of the debt is unsecured bonds.
      • The revolver draw isn’t all bad – they transitioned ~200 hotels to Sonesta in 2020/2021 and thought it had a chance of being disruptive, so they did it out of abundance of caution. It *was* disruptive when you add in COVID lock-downs, but both are looking like they are in the rear view mirror.
      • In some ways, this reminds me of CPLG, but sketchier – CPLG owned hotels and leverage got a bit too high. But CPLG sold poor-quality hotels at amazing levels, delevered and create value. Eventually they sold the whole business.
    • Bottom line: Given this is a levered equity, if you think the enterprise value is too low, that likely means the equity stub could have A LOT of upside. But also means A LOT of risk!
  • The Assets – Hotels and Service Properties:
    • The hotels are managed or operated by franchisees of Sonesta (261 hotels), Hyatt (17 hotels) or Marriott (16 hotels), etc.
      • About half of these are extended stay hotels, with the other being a mix of mid-level to some luxury. But luxury is in the eye of the hotel-er.
      • The hotels are recovering from COVID nicely, but no where near peak. The company did provide monthly operating stats in their deck which is nice.

    • The Service Properties / net lease portfolio came from the SMTA acquisition, which was a special situation if anyone followed it
      • The largest tenant in the net lease portfolio is TravelCenter of America (45% of minimum rent owed, but larger on a $ value basis – likely 60%)
      • TravelCenter is public (ticker: TA) and is a full-service truck stop.
      • TA is doing quite well fundamentally. Looks like EBITDA has doubled LTM 9/30/21 vs. 2018. Haven’t fully dug in, but seems like if trucking in America is doing well, TA is doing well.
      • Other tenants in the net lease portfolio include Shopping Centers (20%) AMC (2%), The Great Escape (2%), Life Time Fitness (~2%), and a tail of others. You can imagine many of these were battered by COVID, but mattered less compared to TA and Shopping Centers.
      • Either way, the company is collecting 100% of rents now and the portfolio is 98% occupied with well staggered maturities. I encourage you to check out the investor deck for more.
  • What else makes this interesting?
    • The situation is hairy: RMR involvement (I’ll get to it) and a levered equity. The latter tends to produce high returns if you get the entry point right and you think the B/S is fixable
    • Abandoned REIT: SVC had to cut its dividend during COVID. Went from 54 cents to a penny.
    • Catalyst: Currently marketing 68 hotels for sale ($579MM of carrying value). Mgmt stated they expect to get at least carrying value in Q1’22.
      • Mgmt said they have term sheets on all properties, though one is a bit more complicated. I suspect we will see staggered announcements to multiple buyers
      • Sales proceeds will first go to refi the bonds and likely downsize and extend the revolver
      • These assets for sale lag the rest of the portfolio in earnings or had deferred capex (read: bottom tier). It also reduces hotels vs. net lease portfolio. Net / net RemainCo should be valued higher.
      • Selling these assets and taking out the impending maturity can act as a cleansing event for investors to come back to the stock
    • REIT M&A remains hot, provides comps:
  • Other Value:
    • SVC owns 8% of TA equity and 34% of Sonesta Holdco. The former is worth about $51MM, the latter I am not sure as they are not public.
      • RMR earns fee on managing Sonesta. We can infer Sonesta makes about $750MM in revenue (0.6% fee on all revenue per RMR 10k)
      • We just saw CPLG get acquired for 2.8x revenue, which would imply $2.1BN EV here.
      • Assume 60% debt / cap (total guess) = $1.26BN of debt and $840MM of equity, implies about $285MM of value for SVC. This is all a wet finger in the air and the carrying value of the investment is $62MM. I use carrying value.
  • Value Build
    • Here is the value build of what I have so far

    • There’s only one thing I haven’t talked about so far and that is the remaining 236 hotels.
    • The table below is how I got that number and it goes back to that depreciated book value discussion.
    • SVC’s lodging-REIT roots trace back to 1995. It isn’t out of the realm of possibility that many of those assets are depreciated considerably.

  • RMR / Intercompany Relationships:
    • RMR manages SVC. SVC owns a lot of Sonesta hotels and owns 34% of Sonesta. SVC owns a lot of TA properties and owns 8% of TA. RMR provides management services for Sonesta and TA!
    • Let me be clearer: RMR manages both sides.
    • I should also mention people have a lot of misgivings about RMR and the Portnoy’s who manage it.
    • Let me copy the statement straight from RMR’s 10-k:

    • Perhaps you can see the risk here. RMR might try to rob Peter to pay Paul. RMR makes more money from managing SVC than it does from Sonesta (like… a lot more. 10x more. $45MM vs. $4-5MM).
    • That said, the web of inter-ownership perversely provides some comfort (admittedly not a ton). Screwing part of the chain should ripple back through and solve nothing. And again, RMR makes more from SVC. If there is a transaction, it is to preserve value at SVC.
    • On the other hand, I will admit an outright sale of SVC isn’t likely. I doubt RMR does that.
  • Are there any signal of what RMR could do?
    • RMR also manages Diversified Healthcare Trust (DHC) which had some liquidity and covenant issues
    • RMR went out and found institutional investors for some assets, from my understanding not all core, which DHC contributed to a JV.
    • They did this recently in Jan-22 at a 5% cap rate but also at the end of 2021. Net / net, it looks to be about a $1BN of value realized.
    • It allowed DHC to get some liquidity, get a real bid on the assets, but not lose all economics
    • Why does this matter?
      • I think if your one hang-up is leverage, I think there are many solutions in addition to selling these non-core hotels in Q1.
      • If your one hang-up is RMR, then I think they’ve shown they are acting in the best interest of the company. RMR is aligned as they earn management fees on the enterprise values of the companies. They also manage the JVs in DHC’s case (lol)
    • Did RMR tip there hand to this??

That’s all for now – stay tuned for the asset sale announcements!

Expectations Reset for Vimeo, Risk/Reward Attractive $VMEO

Reading Time: 13 minutes

Vimeo stock collapsed following the spin from IAC. That caught my attention, I read some of their calls, but I never really dug in. Then, in early January, I tweeted there was an interesting cash-covered put trade you could do at $12.50 strike. As Vimeo stock has fallen more, I decided to do some “napkin” math on the stock.

Say Vimeo grows half the rate of management’s target, FCF margins end at 20%, and priced at 20x FCF. Discount that back at 10% and you get a market cap that isn’t too far off from today. These are all “finger in the air” numbers, but it showed me I should do more work.

If I had one takeaway from reviewing the company is that each Vimeo subscriber is not created equally! And when you break down the math, the targets become much more believable. If you want to cut to the chase, I’d suggest reading the “All Customers are Not Created Equal” section below as well as the model cut outs I have.

Is there risk? Of course. But I think many are likely saying, “eh, I’ll just wait” right now and that’s big time group think.

But first, I’ll go through a quick background, why the stock has gotten pummeled, and what you need to believe to make money from here. I’ve included a few screen shots of two of my models to emphasize this point.

Background:

Vimeo was spun out of IAC in May 2021. The spin followed strong 2020 results as Vimeo enabled many businesses to operate during the pandemic. No doubt, Barry Diller & Joey Levin at IAC recognized tech / SaaS multiples were high and a partial sale + spin would be best for shareholders.

Indeed, IAC sold a partial stake in Vimeo for $150MM which valued the company at $2.75BN in November 2020. Then in January 2021, another $300MM of equity was sold valuing Vimeo between $5.2BN – $5.7BN. In the first case, the valuation was a touch under 10x ’20 sales and then quickly moved to about 20x sales.

Today, we’re looking at Vimeo with a market cap of $2.3BN, or 6x ’21 sales (5x if you exclude cash, as Vimeo is FCF+, albeit from SBC & deferred revenue). Spun out at $57, the stock can now be purchased for under $14.

Ok with that background of “why Vimeo is even public” out of the way, we can explore why the stock is getting hammered, and then we can address why it’s a reasonable buy.

Why did Vimeo stock get pummeled?

Vimeo’s stock has gotten smoked for a variety of reasons.

  • Pandemic-enabled companies are coming home to roost (Peloton, Zoom, Docusign, Moderna are all down >50%)
  • Joey Levin straight up said it was expensive!
  • Growth is decelerating
  • Lost credibility: Vimeo will likely miss targets in its first year following an investor day that promised 30% growth for next 5 years
  • They are changing price strategy starting in ’22. A foundational change can lead to volatility
  • Spin dynamics, possibly
  • Investors are less enamored with tech / SaaS

I won’t go into all of these, but I think the first few are worth going through.

Pandemic-enabled and “a bit rich” at the spin:

In IAC’s Q3’20 letter, Levin stated that Vimeo was “a business that benefited meaningfully from the pandemic.” They also said, “we can’t be certain that the magnitude of the positive lift to Vimeo will persist when the virus’ effect on our lives becomes less pronounced…

They went on to say, “Vimeo’s access to capital inside of IAC will be much more expensive than access to capital outside of IAC.” They decided to test the market by selling some shares (Nov ’20) and then some more (Jan ’21). They noted how the investors were willing to pay on a P/S multiple, almost besmirching the reputation of the buyers!

Read between the lines. They were saying others are willing to pay much more for Vimeo than we are.

Growth deceleration + Lost credibility

In that same IAC letter, they called out acceleration during the pandemic which was obvious.

Prior to the pandemic, we were steadily proving Vimeo’s fit in the market. Organic bookings growth consistently accelerated last year from 11% in Q1’19 to 27% in Q4’19 as we began to expand from our filmmaker roots to a broader audience of small businesses and large enterprises. Then the pandemic hit, and that acceleration exploded to 41% in Q1, 79% in Q2, and 56% in the most recent quarter.

If we look at the latest monthly metrics, we can see Vimeo is growing strongly, but at a slower pace. They actually face the worst comps in Q1’22 so it is likely this decelerates even more.

Vimeo Monthly Metrics are decelerating

Total revenue is coming down from high-50s to 60% to 40s, high-twenties and now around 23% in December. Look at Q1’21 figures and we can probably conclude comps will be tough. Perhaps the company grows “just” high-teens / low twenties.

This is problematic as management set out much more lofty 5 year goals at their investor day in March 2021. A few quarters in and it looks like we will be under the goal.

Vimeo hasn’t reported Q4 yet, but investors can look at the reported monthly metrics as a guide. Even before they reported December metrics, they were guiding investors down at conferences:

[Regarding Q4]. What we have said is that revenue growth to be about 25% year-over-year. And if you think about that, we are lapping a very strong growth rate in the fourth quarter of last year, which was about 54%. So on a 2-year stack basis, we are significantly higher even compared to Q3 of this year. We haven’t talked specifically about 2022 and what the growth rates would be there. We are still in the planning process and for all the reasons that you talked about, the visibility being harder. We’ll provide more guidance as we get through this year and into early next year.

But what we have said is that the 30% growth rate is unlikely next year. And we also believe the first half of next year and the growth rates will be muted for the same comp reasons that we talked about earlier, and we expect the growth rate to be accelerated in the second half of the year. So if you think about our growth rates coming down in the second half of this year, that would continue through the first half and then we expect it to reaccelerate sometime in the second half of the year.

My emphasis added.

But let me say one heuristic I have learned over time. Anytime a company says that “we’ll make it up in the second half”, it is a SHORT for me.

But Dilly D – if that is the case, how can you possibly buy the stock now?

I think a lot is priced in at this point (also dangerous words as making it up in the second half). But after studying the business model, strategy, and thinking about the TAM, I do think this business can continue to grow at high rates.

Ok enough depressing talk, let’s talk about why Vimeo now looks cheap!

Why Does Vimeo Stock Look Cheap?

  • Vimeo is a more focused company, post-spin. They are free to operate the way they want & invest where they want. Focus on a singular goal is important.
  • End of the day, Vimeo is a good business
    • Classic “freemium” model converts users to paid in highly efficient manner. That said, enterprise customers (where decent amount of S&M is dedicated) are worth way more than typical “Pro” subscriber.
      • Enterprise 1% of subscribers, but 25% of revenue.
      • 50% of paid customers started off with the free plan (i.e. freemium model)
    • Vimeo is an alternative to YouTube for business
  • Pandemic likely pulled forward sales, but also accelerated market growth and adoption.
    • Decent amount of growth is “locked in”
    • I’d gamble some things from the pandemic will stay (e.g. virtual “town halls” for companies, more video options for live events, etc.)
  • Brand value is worth something (I won’t dive in here, but something to think about)
  • The “What do I need to believe?” case seems reasonable

More Focused

First, I think a focused, small company can really do wonders. Investors worry big tech will squash the “little guy.” See online dating, industrial distribution, media content, marketplaces, among many others. But Vimeo lives and dies by this “niche.” They come into the office everyday thinking about this one thing.

Steve Jobs said with “focus and simplicity you can move mountains.” To me: stand alone company = more focus, though maybe Vimeo requires more investment short-term.

I think we started the year with about 75 quota-carrying sales headcount, and we would end the year at about 150, so almost doubling. We have opened offices, at least in 4 or 5 new geographies that we didn’t have at the beginning of this year, so significant expansion

Seems like they are investing for growth.

End of Day, Vimeo is a good business

On the Self-Serve segment of our revenue (meaning, a customer begins to pay Vimeo without having spoken to a salesperson), we’re seeing about $5 in profit for every $1 we spend in marketing. That ratio has continued to steadily improve and we haven’t yet found the limit on our ability to spend on marketing with those returns

IAC Letter

IAC also mentioned during the pandemic that Vimeo “accidentally” went EBITDA positive as the growth resulted in a lot of operating leverage.

Go back to the 2020 summary results with long-term goals below. Look at that operating leverage on the gross margin line and EBITDA. Pretty impeccable. This has been true over time when you spread the financials as well and look back to 2018 and 2019. I do think a SaaS company like Vimeo should be able to reach 20%+ EBITDA margins, which we can get into in the model later.

All Customers are Not Created Equal

As mentioned, Enterprise is just 1% of subscribers, but 25% of revenue. This checks out with their other disclosures:

As of December 31, 2020, we had over 3,800 enterprise customers, who, as of the quarter ended December 31, 2020, pay us over $22,000 per year, on average. We define “enterprise customers” as those who purchase plans through contact with our sales force. Our enterprise customers grew 87% year-over-year for the quarter ended December 31, 2020, and these customers now represent nearly 25% of our total revenue for the same period.

The goal is to increase Enterprise exposure. In fact, as of Q3’21, it was 30% of revenue.

I created a hypothetical scenario where Vimeo had 100 paid customers, 99 on a “Plus, Pro, or Premium” contract and 1 enterprise customer. Let’s assume nothing changes other than their ability to gain one more enterprise customers. Note, I somewhat made up numbers to back into an ARPU roughly around today’s levels.

The other subs can be flat, ARPU can be flat, but the mix effect can drive significant results.

And assuming ARPU is flat is pretty conservative. They stated in their S-1 that Net Revenue Retention was 110% and in Q3’21 they stated:

Our enterprise net revenue retention remains healthy with our sixth consecutive quarter of NRR above 100%.”

Pricing Strategy Change

Let me also say they are changing their pricing strategy. As I said, foundational changes can cause a lot of turmoil. Currently, this is in “beta” but they are moving from a storage-based model to a “per seat” model. In other words, they are going to try to base payment tiers off of customer success. You host a webinar, Vimeo will charge off of registrants. If you have an internal library of content, it will be based off of admin seats.

This may turn off some people. But Vimeo is doing it now because they feel they’ve expanded the product platform enough to make it enticing. Plus, aligned payoffs makes a lot of sense. Think about Facebook ads where the company buying the ad only pays when someone clicks – that is high ROI and easy to tie which increases lock in.

This is no doubt a big project and scary, but they have been talking about it for at least a year. If it works, they’ll move customers up in pricing tiers (e.g. from the self-serve model to a higher tier). For what it is worth, most SaaS companies are on a per seat model.

Here is Vimeo talking about converting customers and retaining them, as well as bringing up per-seat pricing. This is from March-21, but they also spoke about this in 2020.

In terms of the conversion and upgrade mechanisms, so I think of it in two ways. One of the biggest features that we see help unlock our free users to convert in the first place is being able to create content. The creation of content is a big barrier. So things like our Create app or Vimeo Create app, being able to record your screen and send a video message, those actions are really the things that we found activate a free user to get them to be paid.

From there, the way we tend to move our users and subscribers up tiers is unlocking more advanced functionality. Some examples would be livestreaming, advanced marketing tools, the ability to capture e-mails within a player, put your customization and branding, add calls to action, privately and securely share content or create a video portal, those are all the mechanisms today. Tomorrow, we see even more mechanisms. You’ll see us do things as we expand our product suite. You’ll see us look at per-seat pricing, for example, so that we can actually use the number of seats or the size of your team as a way to move people up tiers. But even what we have today, we see, I think, about 25% of our self-serve subscribers move up tiers from those other features I just mentioned.

Vimeo has >200 million free users today and they have a good history of converting them to paid. I think about Dropbox: it is much easier said than done converting free users, but when you are actually able to bring them up the chain, it is a beautiful thing.

If you go back to the S-1, it seems like this isn’t a “new” change, but something thought about for awhile now:

Over 65% of our new enterprise contracts came from customers who were existing free users or self-serve subscribers first

We seek to employ a “land and expand” strategy where we inspire our existing subscribers to increase video adoption and usage and upgrade to higher-priced plans over time. For enterprise customers, we seek to expand the number of employees, teams and departments using our platform and increase contract value organization-wide.


What about YouTube?

All of this can be a disconnect for people who quickly think of YouTube as a competitor. I’d say a lot of YouTube is B2C, ad-driven revenue.

Most people today probably still think of us as the sort of indie smaller version of YouTube. And for most of our history, that’s what we were. We were a viewing destination and a place to watch a video, like YouTube.

And 3 years ago, we pivoted away from that strategy to really being a B2B video SaaS company…today, we enable any business of any size to connect with their customers and their employees with video…we do this by providing a very simple, high-quality, end-to-end solution for those businesses and professionals. So SMBs and marketers will use us to make social media videos, post them all over the web and drive traffic back to their business or store. Fitness studios and churches will use us to live stream their classes and their sermons. And yes, we have Fortune 500 companies using us to host virtual town halls and conferences and events

Anjali Sud at a GS conference in 2020

Video is a big market and there are a lot of different use cases (read: niches). To head off the “YouTube vs. Vimeo” argument, let me pause and offer a few reasons why someone would choose Vimeo.

  • YouTube is quantity over quality: Vimeo can offer higher quality videos with more customization
  • No ads: there is a component of control here, such as no control over what ad plays in front of your video. Plus, an ad is inherently trying to drive traffic away from the site. That is NOT what a Vimeo customer wants.
  • Make money with pay per view: Back to that fitness class example, a small business can set up a “pay per view” using Vimeo
  • Password / privacy protection: Can create company specific vids or those for customers without sharing with the world

It’s reasons like these that the NYSE does live stream of opening and closing bell on Vimeo, or why Starbucks does workforce training on the platform. From a quality perspective, a lot of music videos are now on Vimeo as well as short-films where the filmmakers care about their videos not being compressed.

Anyway, it is a difficult question for many of the 800lbs gorilla squashing Vimeo’s niche, but I go back to how big the video market is. To me, the analogy is similar to an Etsy vs. Amazon – both can exist.

I think this conversation on Vimeo will not die down. It will likely continue to “dog” the company for some time, especially when reports of other video players adding new features (like Zoom) emerge. Unfortunately, I can’t “prove” Vimeo will win in every case. That’s the bet.

Summary Model Scenarios

For the first model summary, I wanted to show a “management case” and have ’22 at subs and ARPU growing 9-10%, for 20% revenue growth, followed by re-acceleration. I assume some modest leverage on COGS, but they are already at their goal, and some fixed cost leverage (mostly coming from G&A – where I assume ~70% of G&A is fixed).

Yes, I do assume SBC is added back to EBITDA for Adj. EBITDA.

I assume, because they’ll be generating so much cash and already have a lot of cash on hand, that they start buybacks in 2023 = FCF. They likely do acquisitions instead, such as the two at the end of 2021, but those assumptions are too hard. Buybacks start at $20/share and stock price increases 15% p.a.

Bottom line: If you think this is reasonable and want to buy the mgmt case, then we are buying the business for 3.7x 2026 EBITDA and the company will be generating a lot of the current market cap in FCF.

In this case, the company will be doing $4.35/share in FCF in 2026 (remember, stock today is <$14). 20x that figure gets you an $87 stock price.

What about the scenario where they were *just* a COVID winner?

I think that’s interesting. The truth might be somewhere in between.

Let’s say subs slow to just 3% a year but ARPU decelerates meaningfully. NOTE: This is in full contrast to the Enterprise customer math we did above! In reality “what I think will happen” is subs could slow, but ARPU accelerates.

But anyway, you can see the results here:

Given I still assume buybacks (at the same prices in the first case) I have Vimeo doing $1.20 in FCF/share by 2026. If you put 20x on that, that’s a $24 stock. That may not seem like much, but that’s 60% over 5 years and foots to a 10% CAGR.

If the truth is somewhere in between, the risk / reward looks pretty attractive now.

I tweeted this in the beginning of the year, because I saw it as an interesting way to play Vimeo and wait for a better price:

Full disclosure, I did do that trade. At the time of writing you can get $2.25 for this contract! That’s an 18% unannualized “yield!” And I also have done that. Worst case, I am buying Vimeo stock at $10.25, or $1.7BN. I am comfortable owning there, too!

Selling cash-covered puts is more conservative than buying the stock. BUT it has less long-term upside. Sentiment seems pretty low, and definitely can get worse, but there is risk you miss out owning a great, little business with a long runway ahead.