We are short shares of TeamViewer AG, a recent IPO in Germany of a freemium-based, subscription software that allows users to remotely control PCs for IT helpdesk, remote work, and customer support purposes. Our writeup on this position is extremely long, in-depth and graphics rich. As such, we are just going to post the quick investment thesis here and encourage you to follow the this link to reach a PDF of the entire report: TeamViewer AG Writeup
Since we completed our a few weeks ago, TMV.GY has reported it's first public quarter. As we expected, results were quite good across all measures the bull track. We are encouraged that the stock has barely rallied on the back of this report. Also of note, we find the 10% weighted "bull case" in our probablity tree to be extremely unlikely. As it is diespoven and falls away, we believe the IRR will become significantly more attractive on the position.
TeamViewer is the dominant provider of remote access software for user support and remote work applications using a freemium model. The company generates most sales from free users converting to paid users, which is driven in large part by a self-service and high-efficiency inside sales force.
A healthy freemium model derives most of its growth from growing the freemium base, which we believe TMV is struggling to do in the face of saturation and meaningful competition. Instead, TMV has chosen to try to wring more dollars out of its existing installed base, a reasonable strategy if done prudently, but one with a limited runway. Management has been extremely aggressive in increasing monetization, both allowing for competitive entry as well as using up virtually all the ammunition to drive billings growth. While this has accelerated billings growth, we believe management has simply jammed the accelerator, pointed the car at a cliff, and, critically, appears poised to bail out right before plummeting over.
TMV is a Permira LBO IPO, and the firm and management are heavily incentivized to sell stock at high prices over the next two years. We believe these incentives have driven the move towards using monetization changes to pull billings growth forward, irrespective of long-term impact to the health of the business.
We believe TeamViewer is already seeing declines in its freemium user additions, and, with monetization efforts near fully tapped out, will see a dramatic deceleration in billings that drives the multiple from that of a hyper-growth software firm (~15x billings) downward in two stages: first, toward other self-service but limited revenue growth peers like SolarWinds, and second, towards LogMeIn, which is the nearest direct competitor and has gone through a similar build-freemium, monetize-freemium, enter-decline cycle.
TeamViewer has been aggressively marketed for IPO, claiming applications it is unlikely to get meaningful traction in and hyping its truly astonishing financial profile (35%+ billings growth, 50%+ EBITDA margins). Looking simply at the financials, one would value this firm highly, as the market has chosen to do. We believe that as the market comes to understand how this growth was engineered and the dim prospects for future growth it will re-rate the shares down sharply, and could size the position up once cracks begin to appear as it would take the current bull case (which is a huge drag on the blended IRR) off the table.
There are four key debates – the first two encompass what business TeamViewer is really in and how the compete, the third asks how much revenue is possible from the business and the fourth translates that revenue into profitability:
TAM: What are the relevant markets? What is their size and trajectory?
Competition: who are the competitors and how do they compare? How is share shifting and why? What is the user base trajectory?
Monetization: What drives billings growth? How sustainable is current growth rate?
Margins: What are long-term sustainable margins? Where is TMV in its margin evolution?
We map the above debates to the model as follows: the first three all drive billings and revenue, while the fourth explicitly lines up with margins/profit. Combined with our view on valuation, these drivers create the following narratives:
Bull case: TMV is a rapidly growing subscription software firm with low churn in a huge, lightly penetrated and expanding TAM whose self-service business model drives unusually high margins. The stock should be valued on a Rule of 40 basis where TMV produces a ~90% revenue growth + op margin figure that corresponds to a ~25x EV/Revenue multiple
Upside case: TMV has substantial runway left to monetize its user base, allowing for stable net revenue retention and gross adds that drive a still robust billings growth rate and unchanged margins. Acknowledging that Rule of 40 overstates its value, we look to an EV/Billings to growth framework that recommends 14x EV/NTM Billings
Base case: TMV billings growth decelerates in FY20 as new user growth additions slow and monetization efforts run out of runway, leaving TMV to look like it is on a path similar to SolarWinds (SWI) – a high margin (52% EBITDA), self-service software company with HSD growth potential (but a high 20s billing CAGR in the interim), justifying a 17x EV/EBITDA (slight premium to SWI).
Over time, we anticipate that further evidence will show that TMV is likely to converge to more LOGM-like metrics, and anticipate what is currently our down and bear cases will eventually become our base case as increasing evidence emerges that TMV has pushed too hard on their monetization efforts and competition is eroding their base
Downside case: as monetization runway ends, growth slows to low-single digits, and management begins to invest more in S&M to support even that level of growth, showing margin degradation over time. The asset is clearly shrinking and should trade on an EBITDA basis for a multiple of 13x EBITDA multiple
Bear case: TMV offers a commoditized product with low switching costs into a stagnant market and has juiced recent billings growth by aggressively monetizing their freemium installed base so private equity and current management could cash out. Having reached the limits of monetization, increased churn, ending perpetual-to-term migration benefits, and slowing gross adds drive billings declines. TMV should be valued as the soon-to-be shrinking business it is and should look through the firm’s unusual revenue recognition to be valued at 4.8x billings, in-line both with lower growth software as well as a DCF
Combined, these cases drive a tree that is highly attractive aside from the bull case risk that the market evaluates this stock solely on its financial profile, particularly if that financial profile is validated by big beats in its first few quarters out of the gate:
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise do not hold a material investment in the issuer's securities.