Q4 2023 Vimeo Inc Earnings Call

Participants

Adam Gross

Gillian Munson; Independent Director; Vimeo Inc

Tom Champion; Analyst; Piper Sandler

Cory Carpenter; Analyst; JP Morgan

Brian Fitzgerald; Analyst; Wells Fargo

William Kirk; Analyst; TD Cowen

David Westenberg

Presentation

Adam Gross

Hello, and thank you for joining Vimeo's Q4 and full-year 2023 earnings live Q&A. Before we begin a few comments. First, this session will be reported 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 views are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today.
But we've also provided information regarding certain key metrics and our non-GAAP financial measures, including certain forward looking metrics. 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 shareholder letter and Vimeo's filings with the SEC as well as the supplemental information posted on the Investor Relations section of our website.
With that, I'll turn it over to our CFO. Gillian?

Gillian Munson

Hello, and thank you for joining Vimeo's Q4 2023 earnings Q&A session. I'm Julia mentioned CFO, and I'm happy to be joined by Adam growth, our interim CEO. You can find our Q4 23 shareholder letter and additional financial materials on our Investor Relations website. As a reminder, in this session, we will talk through some non-GAAP terms and you can find the closest GAAP terms and reconciliations in our shareholder letter before we jump into Q&A, a few points on the quarter. In 2023, Vimeo made significant strides in improving profitability while also showing bookings revenue and some encouraging PRODUCT metric improvements in the second half of the year. We delivered solid results in Q4 with revenue flat year over year, adjusted EBITDA of $13 million and $10 million in free cash flow ending the year with over $300 million in cash.
As we look at our bookings, a couple of key items, standout Vimeo enterprise continued its strong double-digit growth trajectory with net revenue retention of 103% and some impressive customer wins in the quarter. In self-serve and add-ons, we saw from green shoots that our bet on product-led growth is the right one, partially offsetting top of the funnel pressure conversion and AOV improved and most exciting for us. The team delivered retention improvements in all cohorts in the self-serve business and in aggregate, looking ahead to 2024, we continue to believe that Vimeo has a lot of upside potential that's been masked by the post-pandemic market environment and our own proactive efforts to put Vimeo On better financial footing. We have been and are continuing to move to more efficient product-led growth with increased investment in R&D improved go-to-market systems and processes and an eye to cost containment, especially in advertising spend. When we net out the factors impacting our bookings and revenue, we expect they will both decline in 2024 as we work our way to a healthier Vimeo. At the same time, the strength of our business model remains evident. We believe that we can maintain adjusted EBITDA profitability in 2024, despite the impact of roughly 5 million in cash compensation substituted for equity grants, we are making strategic changes to the business that we believe will lay the foundation for healthier, more profitable growth in the future. And Adam and I are looking forward to talking with you today.
With that, let's open up the line for your questions.

Question and Answer Session

Operator

Tom Champion, Piper Sandler.

Tom Champion

Maybe Adam, to begin with you. So within booking's clear progress on the enterprise side. And I'm wondering if you could just talk about how you're thinking through self-serve and the add-on segment, just as you managed to go forward and, you know, some of the push pull, but between kind of upper funnel friction and maybe improve retention, maybe how are you thinking through that part of the business? And then maybe for Jillian, the letter talks about lower ad expense after reducing this line item in 22 and 23. How are you looking to further rationalize this? And what does that make sense given the top line implications? Thank you.

Adam Gross

Yes, great. Thank you for the question. And I'll see if I can cover the first part of that and hand off to Julien, one of the things that makes Vimeo unique is we have tens of millions of people interacting with our products every month, and that's just an enormous differentiation for us. We have the second largest or most popular video player on the market. We have all of these people experiencing and understanding our value proposition every day.
And as we've talked about in the letter, we really think there's an opportunity to take that organic traction to take those product experiences and better and more efficiently, convert them into free users and ultimately into paying customers. We think that that's it while product investment is important, why what? You've already seen us release in terms of improvements to the overall product experience to our checkout flows, as you mentioned, focus on both activation and retention. These are things that we are heads down, actively working on and optimizing against and are optimistic about for the future.
And I'll let Gillian and speak to some of the more specifics.

Gillian Munson

Yes. So as it relates to the advertising spend, I think what you're really seeing is us being more confident. So when we look at the business and we look at the green shoots we see in terms of what product-led growth can do for the business. We're feeling emboldened to take a little bit more risk in getting the business more quickly to the kind of business model we think is the right answer long term. So when we look at advertising spend, we dropped it about 20 some odd percent in 2023 after dropping it in the 10s in 2022. We'll probably drop it more this year, and that's going to make room for more product investment that we think is going to get us to the right metrics to get us to growth over time.
When you look at Vimeo as a whole, there's a lot going on at the top line from bringing down the other products, both in bookings and revenue so that we get that rationalized and then the investments we want to make in self-serve and Vimeo enterprise over time. And so what you're really seeing us do is actually because we're feeling good about the business actually proactively take a little bit more risk and we'll bring down advertising, more get ourselves to the right profitable mix, invest in the product and then move forward from there.
Cory Carpenter, JPMorgan. Corey.

Cory Carpenter

So gradually and I have to just stay on drilling or Adam, if you could just expand on. You mentioned, I think twice now the green shoots you're seeing on the product side, so you can just expand a bit on what you're seeing there in between.
Gillian, just as we think about your 24 outlook, it feels like it certainly is a big impact from the other segment, which you're kind of managing down on purpose. But maybe if you could just help us set our expectations for it what you're expecting across enterprise, self-serve and other so that the ample thinking.
I take those numbers questions, and I'm going to pass it to Adam a little bit more on the product.

Adam Gross

So let me start first with the guidance. So when you look at the business, there's both the bookings and then what follows is revenue. So in terms of how we're thinking about the business in the bookings side of the business. As we get Vimeo enterprise bigger, its rate of growth will probably slow. And then in the other segment, we continue to think that's going to decline as we manage that business down to basically being OCTOTT. is a real opportunity for us. But for right now, we view it as more optionality. We have a great team running OTT. So then you get to the self-serve business, which is the biggest piece of the business there. What we're doing is and you see and the guidance is that cut to the ad spend as to the environment we are in that will probably cause that to go down as we look at 2024, but it's going to get us to a healthier place.

Cory Carpenter

And so then that gets me to the revenue revenue trails the bookings. So you'll see that come through the biggest delta in the revenue of as I look at 2024 is actually the other segment where we continue to bring that down. Those bookings are followed by that revenue. And then the two trends I talked about in terms of Vimeo, enterprise and self-serve follow the reason we think this is the right way to look at the business is those green shoots?

Gillian Munson

So a couple of things on when we look the rate of new bookings, particularly in the self-serve business relative to the rate of cuts we're making in the ad dollars, there is a positive relation there. In other words, the new bookings are falling less than the ad dollars are falling, and that is a trend we started to see in the second half of last year. We are seeing it in 24. That makes sense feel confident that the product is starting to do exactly what we want it to do, which is sell itself. Other metrics that we are looking to is conversion of that traffic to new sales has been coming up. Aovs and RPUs are looking better and really exciting in the quarter for us is those retention trends that we mentioned in the letter that we've particularly focused in on self-serve, where we saw increased retention across the board. And in all cohorts, that's a big piece for us in terms of thinking about how the product is performing for us and how we kind of put it all together so hopefully, that gives you some of the green shoots kind of how we're getting into the math on it.
And then, Adam, if you want to add anything on sort of how you're thinking about products and how they're performing?

Adam Gross

Yes, sure. From the product side of one of the things that I think we're seeing across the industry is obviously there's a tremendous amount of innovation and excitement in video in general. And we're seeing our customers asking us to help them make the video more strategic for them, what you're seeing and how we're kind of modifying and evolving our products, especially on the enterprise side to be more solution oriented to fundamentally be more strategic to our customers and hopefully create more value and allow us to capture more value.
As part of that last quarter, we launched Vimeo marketing, which is kind of the first pillar of our new enterprise product strategy. You'll see we've got a lot more stuff like that in the pipeline in the coming quarters. And the early results are promising in Q4. We have some great customer wins are mez, Southwest Toyota Domino's Gartner, we're really seeing a lot of adoption across across a broad swath of industries, which is a great early indication that our product value proposition is being well received.

Operator

Brian Fitzgerald, Wells Fargo.

Brian Fitzgerald

On the sales execution and the macro issues you talked about last quarter, I think it was lead handling and also some maybe some macro softness with respect to SMBs. Could you give us an update on what you saw in the current quarter? How did you address those lead handling issues, maybe starting to see improvement and any signs in the environment for SMBs?

Gillian Munson

Sure. And let me just take that some of the macro stuff. Obviously, we're not economists how the environment is, what it is. No meaningful change in the environment that we're operating in that was noticeable in the quarter.
In terms of the sales team, we made nice progress during the quarter. We still have work to do there, but we feel like those the issues that we highlighted last quarter are we're working our way through and working beyond Adam, I know if you want to add anything there.

Adam Gross

Yes, I'd just say that we're continuing to be proactive and aggressive in optimizing both the systems and structure of our sales organization. We made some changes that we rolled out at the beginning of this quarter on reorganizing how we look at territories, looking at our systems about how we're around lead handling and other issues and continue to be very focused and we're optimistic about the opportunities for optimization there.

Brian Fitzgerald

Got it. Thanks. And I wonder if I could get one quick follow-up on and you've talked about AI investments. I think we're starting to see some of that in the product in terms of multi-language closed captioning. Any are there key areas of opportunity you see there in terms of using AI to address key customer pain points?

Gillian Munson

Obviously, AI is a tremendously exciting area in video for our customers, and I would encourage all of you too. Stay tuned. We've got a lot of exciting products in the pipeline.

Operator

William Kirk, TD Cowen.

William Kirk

Thanks for the questions. So first off, you guys have been able to generate some solid free cash flow over the last few quarters. Tom, just wondering how we should think about your ability to convert EBITDA to free cash flow in 24 and beyond POM? And then I have one additional question.

Adam Gross

Yes. I mean, the free cash flow and EBITDA story here really shows you what a great business model Vimeo has. And even while we make the transitions that we've been talking about to get the business to where we want to get it to in terms of setup, we're able to have really strong EBITDA results. As you saw, our guide was for essentially flat EBITDA, and that's even taking in another 5 million of cash cost to replace some equity with cash, given where the stock is on. We are cash flow was in excess of the EBITDA in 2023. I think it will be again in 2024. That's the beauty of a subscription business. You get you oftentimes get the cash upfront and we think that trend will well continue for the business.

William Kirk

Great. Thanks and then in terms of the investments, you talked about there being some areas that may two to develop and looking out even into 2025. Can you just talk about the balance of your R&D investments in terms of enterprise versus self-serve and then some other areas you feel you need to invest other than on the R&D side, like for the sales force? Or do you feel like you're pretty squared away in those other areas?

Gillian Munson

Let me just take the areas generally and then I'll have Adam give you a little bit more color on kind of where we're focused on. Just one reminder on the R&D front, much of Vimeo's product line spans the customer bases. So a lot of the investments we make actually benefit most all of our customers across the board. But when we look at the blend of investment, we're really trying to make sure we're freeing up investment dollars to put in the R&D area to really come up with the best products we are feeling emboldened by what we're seeing out there and the business that that's the right strategy and where you're seeing us move that way?
I've been on a little a few weeks ago, we made a small reduction in force in our G&A areas on and on just to right-size us for where we want to be. So in general, what we are looking for is about flat headcount. And there will be a mix shift towards the R&D group as we work our way through the year.

Adam Gross

Yes, going to us speak to the second part of your question. One of the things that we're becoming more aggressive about is how we talk about our products, how we talk about the innovation that we're creating and how we make sure that our customers are aware and adopting of all the great things that we're releasing in just a couple of weeks ago.
At the end of the quarter, last quarter, we released our new winter 2024 release. I encourage you to go to the website, you can take a look at all the areas that we're are focusing on innovating. And I think it will give you a pretty good flavor of how the innovation kind of spans what we're seeing both on self-serve and where customers and individuals can get started very quickly all the way up through with a brand-new editor with saw things like multi track audio all the way up through advanced features for enterprises like a new integration analytics API, which is super useful for understanding employee engagement. So I'd just say stay tuned. You can numb. We're going to be more clear about how we're communicating our product capabilities and hopefully easier for all of you to keep track.

William Kirk

Okay. Really appreciate the color.

Operator

David Westenberg at Jefferies.

David Westenberg

Hey, thanks so much. I wanted to ask I noticed in the shareholder letter, Adam, and still had interim Max-Q name. I was just curious if you guys could give us an update on where you guys are in this year's Birch where you guys are looking for the right fit and what kind of time line that might be around that? I know obviously you guys are looking for the right fit, not necessarily type perspective, but any update there would be helpful.

Gillian Munson

So the CEO search continues on. And in the meantime, Adam is full time running the business with us. We're having a lot of fun doing it and we're headed the right direction. And I think the strategy that Adam has laid out and we've been laying out for the Street is exactly the direction we are going and the right fit for us will fit with that strategy. So no, no update on timing. Of course, these things are hard to tell on timing, but we are not holding back at Vimeo. Adam is here with us, and we are working really hard on the business.

Adam Gross

Yes, hopefully as you're seeing in the letter and the other results in the business and across the product releases. We, as an organization, are fully hedged down, engaged and really enjoying taking advantage of all the strategic opportunities that our market allows Got it.

David Westenberg

And then maybe just a second question, if I may. I think a really good execution from you guys on the enterprise side, maybe getting a little bit lost in the sauce, if you will, with everything going on in other delta, you talked about some of the growth coming down, just the law of large numbers, but how durable do you see the growth in enterprise and tell that you guys have an exciting product portfolio ahead of you, like how do you think about the balance in enterprise between growing a growing customer count and ARPU would be helpful.

Gillian Munson

So just real quick on overall growth. And I think the point we tried to make in the shareholder letter, and I think you're what you reflected in your question is that there's a little bit it's hard for this all puts and takes in the V-NEO top line that in a way is muddying really great progress rate. The Company ex other has grown for the last two years and we continue to see a lot of great growth prospects. We're actually taking some risk in terms of putting a little bit more pressure on the self-serve business to get to where we want to be in terms of the mix of product versus marketing led growth. But we continue to see really strong growth prospects for Vimeo as a whole and in particular in Vimeo enterprise, where we see double-digit growth as absolutely the future of that business with a lot of opportunity. Adam, do you want to add to that?

David Westenberg

And I know I think come up, you're going to see innovation and product releases across both businesses. I think the benefit of video becoming more strategic to organizations of all sizes should help provide tailwinds across our channels.

Gillian Munson

And I just realized you added a question about ARPU and subs and I want to make sure I came back to that. Our P. and RAV.s have been in about the $20,000 range, and we think there's still a lot more opportunity for us with customers to sell. It takes time to work that through the system and of course.
And then your enterprise business is a blend of SMBs and mid-market and corporate is Corp strat. And so it's just about the timing on that to us. That's time not on it. We have to work our way there.
Got it. Thank you, guys. Appreciate it.

Operator

With that, there are no further questions. I'll hand the call back to Gillian.

Gillian Munson

Thanks for joining our 2023 Q4 live Q&A. We look forward to updating you again next quarter. Have a great evening.