Vimeo's Growth & Value: Insights into the Online Video Market

Vimeo Completes Spin-Off from IAC, Begins Independent Trading

Today marks the completion of Vimeo’s separation from IAC, resulting in the video platform operating as a standalone company listed on the stock exchange under the ticker VMEO.

The news of IAC’s decision to spin out its video service may have been overlooked by some. However, now that Vimeo is publicly traded, and with access to its past financial data, it presents a valuable opportunity to assess the company’s current standing.

Analyzing Vimeo’s Performance and Market Position

Several key questions arise: What is the rate of Vimeo’s growth? How financially successful is the business? And what insights can its spin-off provide regarding the broader video industry?

It’s worth noting that Kaltura, a competitor in the video technology space, recently postponed its initial public offering (IPO) briefly due to volatility in the public markets earlier this quarter.

Therefore, Vimeo’s entry into the public market could potentially influence a future IPO from a highly valued, private company – a so-called “unicorn.”

A Deeper Look at the Financials

Considering this context, a detailed examination of Vimeo’s financial performance is warranted.

Let's explore the key metrics to understand the company’s trajectory and potential within the competitive landscape.

Key Takeaways: The spin-off allows for focused analysis of Vimeo’s growth, profitability, and its role in the evolving video market.

Revenue Expansion

Between the first quarters of 2020 and 2021, Vimeo experienced revenue growth, increasing from $57 million to $89.4 million. This represents an approximate 57% increase in revenue.

While a substantial rate of expansion, this growth isn't unexpected given the surge in digital video consumption globally during the COVID-19 pandemic. This increased demand likely contributed to the company’s performance during this period.

Gross Profit Gains

Concurrently, Vimeo’s gross profit rose from $38.6 million to $64.5 million over the same timeframe, marking a gain of approximately 67%.

The faster growth of gross profit compared to revenue indicates an improvement in Vimeo’s gross margins from Q1 2020 to Q1 2021. Specifically, margins increased from 68% to 72%.

This is a positive indicator. Strong revenue growth coupled with improving product economics provides a clear trajectory toward sustained positive cash flow.

Cost Management

Vimeo’s growth period also saw a reduction in several key expense categories as a percentage of revenue. This included Research & Development (R&D), Sales & Marketing (S&M), and General & Administrative (G&A) costs.

These cost reductions were measured from Q1 2020 to Q1 2021, demonstrating efficient operational management.

Profitability Assessment

Did these improvements translate into significant profitability for the company? The results were partial.

Vimeo's Financial Performance

Vimeo demonstrated improvement in its operational losses, decreasing from $17.2 million in Q1 2020 to $5.6 million in Q1 2021. This represents a noteworthy positive trend.

Furthermore, Vimeo achieved a significant milestone by reporting positive net income during the first quarter of the current year. This indicates that, according to Generally Accepted Accounting Principles (GAAP), the company generated a profit during that period.

The Source of the Profit

Despite having a negative operating income during the same timeframe, Vimeo was able to achieve positive net income due to its "other income." This income, totaling just over $10 million in Q1 2021, stemmed from the sale of Vimeo’s remaining stake in its previous hardware division.

This sale effectively offset the operating loss, resulting in positive net income. While this contributed to a favorable financial report prior to the company’s initial public offering (IPO), it’s important to consider the underlying operational performance.

The operating results provide a more accurate reflection of Vimeo’s core business performance and demonstrate progress towards sustained profitability. Therefore, it’s crucial to differentiate between net income, boosted by the asset sale, and the company’s ongoing operational trajectory.

Misinterpreting the Q1 2021 net income figures could lead to an inaccurate assessment of Vimeo’s short-term profitability. A clear understanding of the contributing factors is essential.

Determining Vimeo’s Value

A common issue with financial reporting sites is their lack of market capitalization data for newly listed companies. This often results in estimations on the day of listing. Therefore, a manual calculation is necessary in this instance.

Reviewing the company’s filings reveals authorization for at least 300 million shares. However, Vimeo concluded Q1 2021 with 156.5 million shares outstanding on a basic count. A fully diluted share count, which is more relevant for valuation, totaled 165.9 million shares as of March 31st.

Based on Vimeo’s current share price of $41.76, the company’s approximate value is $6.93 billion.

Several observations regarding this valuation are worth noting:

• The company’s stock is currently down approximately 19%, although the reference point for this decline isn’t definitively stated. This is a concerning indicator.
• Extrapolating from Vimeo’s Q1 2021 revenue, the company’s valuation represents a multiple exceeding 19x its current revenue run rate. This is a positive sign.
• Vimeo’s most recent private market valuation was around $5 billion.

Despite today’s less-than-ideal stock performance, the company’s valuation and resulting multiples appear favorable, assuming accurate calculations, when contrasted with its prior private valuation.

What implications does this hold for Kaltura? Vimeo’s achieved valuation is encouraging for the smaller company. A nearly 20x multiple of current revenue is generally considered a strong result.

This suggests a positive outlook for companies in the same sector.