Vimeo - Q2 2023

Transcript

Operator (participant)

Good morning, thank you for joining Vimeo's Q2 2023 Earnings Live Q&A. 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 other such statements. These forward-looking statements 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 or in isolation from, GAAP measures.

Additional information regarding Vimeo's financial performance, including reconciliations with comparable GAAP measures, can be found in our shareholder letter 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 CFO, Gillian.

Gillian Munson (CFO)

Good morning. Thank you for joining Vimeo's Q2 2023 earnings Q&A session. I'm Jillian Munson, Vimeo's CFO, and I'm happy to be joined for the first time on quarterly earnings by Adam Gross, our recently named Interim CEO. Adam has been with us for about a month and is quickly ramping up on all things Vimeo. We're excited to have him on board, particularly given his wealth of experience as a leader in the SaaS space and as a member of Vimeo's board over the past two years. We're all looking forward to working with him going forward. Before we jump into the Q&A, I'll mention a few main highlights from the quarter. First, we continue to believe we are on track to return bookings to growth in the back half of this year.

Second, our efficiency initiatives continued to pay off, with gross margin up, operating expenses down, and improved profitability year-over-year in the quarter. Third, we showed that we could control costs while still investing in innovation with our AI-powered video creation suite, which we believe will help make video easier and more accessible for all. It's still very early days in terms of where video communication can go, particularly in the business world. I'm confident that Vimeo's platform and products can be part of facilitating this evolution, and believe we're making good progress against our goals. We look forward to taking your questions.

Operator (participant)

Our first question comes from Brian Fitzgerald at Wells Fargo. Brian?

Brian FitzGerald (Managing Director)

Yeah, thanks. Adam, welcome. We're looking forward to working with you. Given your experience with SaaS businesses in the past, we're just wondering if there's anything you could share about what you'd like to bring to the business in an operating role, any new priorities in strategy or, or go-to-market? Thank you.

Adam Gross (Interim CEO)

Yeah, thanks so much for the question. Really three things I'm excited about as I get up to speed here. The first is the technology. I think we're in the early days of seeing video's impact on business. I think it's gonna be an exciting decade ahead as we as what video is evolves and the applications for it in the enterprise expand, and we have an opportunity to find new strategic ways to partner with our customers in bringing video value to them. The second is the team. I've been a member of the board for two years. I had a hand in recruiting most of the management team and working with them in the boardroom, and so that's really helped get up to speed quickly.

Very much looking forward to working with them as we continue to execute on the strategy. The last is really our kind of our go-to-market model. If you look at my career and my experience at places like Salesforce and Dropbox and Heroku, one of the common themes is really being able to marry really innovative technology with innovative go-to-market models. When you look at the opportunity we have to connect the self-serve business with the enterprise business, and you look at how really successful companies have done that in the past, again, like the Salesforces and Dropboxes of the world, I think it's a really exciting opportunity for us here.

Operator (participant)

Our next question comes from Tom Champion at Piper Sandler. Tom?

Tom Champion (Equity Research Analyst)

Thanks. Good, good morning, everyone. First question is around the AI-powered video creation suite, and just curious, Jillian, if you could talk about the early experience here and if the product is available for enterprise and self-serve customers. I think last quarter, you shared an interesting stat around users that upload video and use a creation tool and the related bookings there. Just curious if that plays into the thinking here.

Gillian Munson (CFO)

Yeah.

Tom Champion (Equity Research Analyst)

Um...

Gillian Munson (CFO)

Do you want me to start there, or do you have more?

Tom Champion (Equity Research Analyst)

Yeah, please.

Gillian Munson (CFO)

Okay.

Tom Champion (Equity Research Analyst)

Please.

Gillian Munson (CFO)

On the AI suite, it's very new, so I think that it's too early to give you stats on how it's doing. It's important to remember that Vimeo's been on a journey with AI for quite a while, and we use AI in a variety of places throughout the product, all with the main goal of our strategy, which is to make video more accessible, particularly for business users. That is a theme throughout our products, and the AI creation suite is just one great example of how you can get up and productive on video fast using Vimeo. I encourage you all to use it. You probably can use it for some of your research reports over time.

I know that for us, for even earnings calls, it's been a helpful tool for us to get the whole process done easier, faster, and make it less scary, if you will, to make video something you use every day. In terms of the strategy, we've talked a lot about this, that Vimeo has really expanded how customers use the products, and I think we talked last time about how we've gone from folks who are just uploading to folks who are using lots of different Vimeo tools to amend the video, create the video, distribute the video, and that continues to be a trend, and this is one of those type of tools. The AI creation suite is available on our enterprise products and in a handful of our higher-end self-serve products.

At the lower end of the product line, you'd have to upgrade to use the AI tools.

Tom Champion (Equity Research Analyst)

Okay, all, all that makes sense. Maybe if, if I could sneak in one more.

Gillian Munson (CFO)

Sure.

Tom Champion (Equity Research Analyst)

Gillian, maybe just remind us. I know, I know SBC was, you know, a little bit of an odd result this quarter, but just remind us how we should be thinking about that through the balance of the year. Curious, with margins generally better than expected, how are you thinking about investing behind growth? Does it make sense to, to, you know, to think more about investing behind the top of funnel within self-serve or other investments to help stabilize and grow the business?

Gillian Munson (CFO)

Sure. You snuck in 2 questions there, Tom, but I'm not gonna-

Tom Champion (Equity Research Analyst)

Sure.

Gillian Munson (CFO)

get you on that.

Tom Champion (Equity Research Analyst)

Why not?

Gillian Munson (CFO)

For our stock-based comp, we are really on a journey with stock-based comp to bring it down at Vimeo. That's gonna happen in two different ways. The key thing that stock-based comp represents to us, and we think to our shareholders, is dilution. As we look at the business, we think that we had been a little too free in terms of the amount of stock we gave away, particularly in 2022. Some of that was just required, as we had a new management team come into the company. We have goaled ourselves to meaningfully bring that down and are on a path to doing that. Stock-based comp expense is a little bit of a trailing indicator of that initiative and also reflects some of the board and management changes you've seen happen over the last two quarters.

When you look specifically at Q2, our stock-based comp was actually a benefit, and the reason for that is, as Anjali announced her departure, we had to reverse some of the cumulative expense we had taken for some of the shares she won't be taking with her. That's what that is. When I look at, at stock-based comp overall, I think we talked about this a few quarters ago, that we were running in and around $20 million a quarter, which we felt was too high a number. With all the different changes and our hard work to make sure we keep dilution lower on burn rate, we think that those, those figures are gonna be more in the $10 million-$12 million quarterly as we look forward here in terms of where we sit today. In terms of expenses and investing.

We have always believed that Vimeo has strong profit capability, and that inherent in the business is really great profitability. We have a 78% gross margin. As you saw, we've continued to bring expenses down. I think one thing we've done really nicely in 2023 is show that even in a transitional revenue period, we can get profitable and we can be free cash flow positive. Underlying that are actually continued investments to drive growth, and we're really trying to balance delivering profitability in a transitional time and in a little bit of an uncertain time, while also investing. Inherently, we actually think the business could be more profitable, but the delta there is some of the investment we are making. We're really focused on great product. We're really focused on making sure our customers are, are getting to the products easily.

We will continue to make investments and sort of make those trade-offs between profitability investment. Our balance sheet and our really strong cash position puts us in a great position to do that, but we are also doing that while generating cash flow right now, which I think is a really nice thing for the company.

Tom Champion (Equity Research Analyst)

Thanks for the comments.

Gillian Munson (CFO)

You're welcome.

Operator (participant)

Our next question will come from William Kerr at TD Cowen. William?

William Kerr (VP and Equity Research)

Great, thank you. bookings growth was a lot better than we expected, and the re-acceleration in enterprise was especially encouraging. Could you just touch on the current booking trends in 3Q, and then maybe fundamentally how we should be thinking about the relationship between bookings and revenue?

Gillian Munson (CFO)

Absolutely happy to. As you know, we've been working our way through a period of down bookings. I think bookings were down in four of the last five quarters. What happens is your bookings precede your revenue, so what you've started to see and have seen in the last couple quarters, I think three of the last quarters, is that revenue has fallen as well following those booking trends. As we look at the business, we are on a path to return bookings to growth. That's our strategy, and we want to return bookings to growth, and then we believe that revenue would follow, and we wanna do this all profitably, as we've talked about.

In terms of the business, we continue to believe, and we confirmed in the shareholder letter, that we believe we can get bookings back to growth by the end of the year, and everything we are doing is oriented around that. We did reduce the rate of decline in bookings in Q2 by a couple points, which is great, but we've got a lot of work to do and a lot of heavy lift to move our way to the end of the year. As you frame it, and you think about how to think about bookings as that leading indicator, we continue to believe it'll be led by VE. That's where the strongest growth is in the business, and we continue to see VE growing as a percentage of the business and as a percentage of our bookings.

It was just under 20% of bookings in the quarter. Offsetting that has been other, which is our OTT product, which is a really great ongoing product for us, and in addition, some products that we've been deprecating. That's now down closer to about 10% of bookings. As VE growth now will overcome that and lead us into growth. In the middle is self-serve, which is the core of the business and the thing that we've always talked about. Growth comes through self-serve, we wanna turn that to growth as well as we work our way to the end of the year. Putting it all together, you'll be led by VE. Self-serve, we hope to turn to growth.

The other portion of our business will get to be such a small portion of bookings that it's not gonna be as much of a headwind on the overall growth rates over time. That's how we're thinking about it.

William Kerr (VP and Equity Research)

Great. Great, thank you. That kind of rolls into my second question, which is, you know, on self-serve, how do you think about, you know, sub stabilization versus versus price, versus pricing and, and getting that as you get that back to, to growth over, you know, over the coming quarters?

Gillian Munson (CFO)

Yeah, in self-serve, what you're seeing in terms of sub declines sort of mirrors what you're seeing in terms of bookings decline. If you step back and look at it on a macro basis, what you're seeing for the overall Vimeo, and you're gonna start to see in self-serve, is that we are focused on going to a higher level customer, a business customer. Business customers use the product more, retain better, have all those financial factors that we think are beneficial for the business. Over time, we are trying to work up ARPU in self-serve. It starts with AOV. It starts with where do you bring customers in, and we saw really nice double-digit growth in AOV in the quarter. Now, it takes a while to roll those AOVs through your overall ARPU, but that's the strategy.

Ultimately, my suspicion is we'll be at a place where the ARPU is probably a little bit faster growth than, say, the subs, as we continue to mix shift the business towards businesses over time. Right now, everything of the company is working on turning both bookings and subs back to growth, and then the pricing will be the X factor in terms of what that looks like in terms of velocity.

William Kerr (VP and Equity Research)

Great. Thank you very much. Appreciate the time.

Operator (participant)

Our next question will come from Chris Zhang at Truist. Chris?

Chris Zhang (Equity Research Associate)

Hi, thank you. I have this question on behalf of Youssef Squali. What do you think is the level of steady-state growth for both self-serve and enterprise business as the situation normalized for Vimeo?

Gillian Munson (CFO)

Well, we're right now really focused on getting the overall business back to growth, so we don't really guide by business. I'll go back to kinda where I, I really wanna make sure people understand the framing. VE is having very strong double-digit growth, 72% in the quarter, and we continue to believe that's where you're gonna have your outsized growth at Vimeo. Then self-serve, we wanna get back to growth, and then as we get it back to growth, then we'll figure out at what growth rate we, we land over time. Right now, our orientation is around turning the overall bookings back to growth by virtue of that strong VE growth and then turning self-serve back to growth.

too soon to kind of peg long-term growth rates, but I would expect that you will always see the VE product have much stronger growth overall in our portfolio.

Chris Zhang (Equity Research Associate)

Thank you. Appreciate your time.

Operator (participant)

Our next question will come from David Lustberg at Jefferies. David?

David Lustberg (Equity Research Senior Associate)

Hey, thanks, and good morning, guys. This is David on for Brent. Around Vimeo Enterprise, wanted to ask about the ARPU dynamics. Wondering if you can tease out what's going on in the declines there between, you know, different product mix versus, you know, seat based, would be helpful.

Gillian Munson (CFO)

Absolutely. ARPU in VE has been about $20,000 for quite a few quarters here, and ultimately, we think it's going higher. We think we can get to higher wallet share in companies overall. The challenge with ARPU, of course, is that when you are growing a business this fast, you have a mix of both customer sizes and new customer incoming price points that you have to sort of mix in to get to an overall ARPU. Over time, we expect that to go up, but because it's still a smaller business, it can be a little bit lumpy as we work our way through. When we look at, there are no trends between customers or customer sizes that were particularly notable in the quarter. I think overall, our aim is to get ARPU up.

There'll be a number of factors that get there. Another indicator that we're making progress along that would be our NRR. As you saw in the quarter, NRR was over 100%. That, that, again, is, is kind of where we were last quarter as well and coming up. We wanna move NRR up, we wanna move AOV up, we wanna move ARPU up, but we are also really excited whenever any customer wants to come to Vimeo. In this early stage of growing the business, if people come in lower than the ARPU and we can move them up over time, that's an opportunity for us that we'll take. It, it will probably take a little time for the averages to move, but the, the trend is the same, is, is to the positive.

As it relates to VE over the overall business, when you look at Vimeo, I think two years ago, our overall ARPU was less than $200, and it has come up meaningfully over the last couple of years as a result of VE's growth and some of the other work we're doing in the business.

David Lustberg (Equity Research Senior Associate)

Got it. That's, that's super helpful. You know, maybe to follow up on, you beat me to my next question on NRR, but I think it's two consecutive quarters of over 100%. Maybe i- if you could provide, you know, any color. I know you guys are maybe a little bit more locked about the numbers, but how that trended specifically versus last quarter, if it's, if it's higher or lower or around the same. You know, I know you said you plan on, you know, continuing to raise that higher. Is that a dynamic of, "Hey, like, we're past the, the COVID cohort that kinda came on and churned off," and you guys feel that that could be more of a steady increase over time as, you know, we get more to this normalized, environment?

Gillian Munson (CFO)

Yeah, a couple factors on, on NRR. Covid cohorts don't really have too, too much to do with our VE business. That really is a business that we almost kind of really took off. It was very, very small and has grown much more meaningfully in the post-Covid period. The Covid cohorts kind of has more to do with the self-serve business. In terms of NRR, we think of it as a holy grail of customers being happy, expanding their use of Vimeo, and that's what we're aiming both the product teams at, in terms of all the new features and functions they're bringing to enterprises, as well as our sales force, in terms of their relationships with customers. NRR to us is a really good sign that we're doing a good job at that.

The way we expect to expand ARPU inside, inside customers is both by expanding the use of Vimeo across a company. Oftentimes, Vimeo will start in one department and then expand out because people say, "Oh, wait, this is really, you know, dead simple way to do video, and, well, my, my partner over here might wanna use it." I, of course, you know, always believe that the whole finance team should use Vimeo, and then the HR team and the marketing team. Actually, it tends to start more in the HR and the marketing, then fly over to a finance team. That's the idea. It's both gonna be expansion of the number of people using Vimeo and with all the kinda cool new features that we continue to bring out, expansion of features.

It's along both lines is where our strategy sits.

David Lustberg (Equity Research Senior Associate)

Great. Thank you.

Gillian Munson (CFO)

You're welcome.

Operator (participant)

At this point, there are no further questions. I'd like to hand the call back to Gillian.

Gillian Munson (CFO)

Thank you for joining our Q2 2023 Live Q&A. We look forward to updating you again next quarter. Have a great day!