Published on the Value Lab 22/4/22
TeamViewer (OTCPK: TMVWF) (OTCPK: TMVWY) is a company that recently hit our radar. It IPOed in late 2019, and has been an interesting idea in the context of WFH, and remote activity in general. They are undergoing somewhat of a transformation, previously a retail company mostly, and only recently leaning into enterprise services, which also now includes AR platforms that are being adopted by high-tier customers. The multiple for TeamViewer is low, probably because the EBITDA developments aren’t great, but considering a fully diluted multiple and business trajectory, the stock appears to be quite a good deal with rather innovative products. With tech being an alright place to park money when you’re not sure about manufacturing and commodities, TeamViewer strikes us as quite an opportune play. We rate it a buy.
A Bit on TeamViewer
TeamViewer is best known for its main product of providing people ability to access and view your computer remotely. This is useful in concierge processes from remote, and has been a mainstay in customer support for a while now. It is a subscription product with a retail price tag that has nice economics and has been supported by current market trends. The target segment has been effectively smaller businesses for now, where enterprise offers simply scale it to team size and the number of remote sessions it should be able to host at a given time. This product is already well adopted by the industry and is something to make TeamViewer attractive, but the new developments with TeamViewer that show promise are the evolutions on the enterprise front, where enterprise revenues are growing in the mix and driven by innovative new platforms.
The newer element of the product portfolio for TeamViewer is Frontline, bolstered by the acquisition of Upskill, and that is AR to enhance remote support offerings for manufacturing and technical jobs. This is new offering is closing great contracts with high profile customers and is a very legitimate and tangible way to increase TeamViewer’s pull in enterprise. The product essentially comprises of a system for being able to give instructions and indications in AR for how to complete technical activities like industrial maintenance, being able to give visual indicators that are bound to objects in the visualized space and not in a position on the camera . They have some nice high profile customers that are already using these software like Ford (F). Management says that now the discussions are about 50:50 split between the traditional TeamViewer products and these new AR ones.
And as we see it in most regions, I would say that there’s somewhat like a split 50:50 between topics which are centered around Augmented Reality solutions for frontline workers one way or the other can be manufacturing field engineering, service technicians, logistics, so all the use cases really. And the other half being classical tensor and engagement manage connectivity, customer interaction products and so forth.
Oliver Steil, CEO of TeamViewer
The overall shift to enterprise billings over SMB (basically the retail market) billings can be shown below.
Even the retail segment is performing quite well, with a boom from the initial pandemic related push into remote working coming off highs, but finding stable levels now, even growing a bit on volumes and ASPs to support the overall strong topline growth. Enterprise is growing at very meaningful rates and shows no signs of stopping, especially as the product is becoming innovative and can probably steal share even if the economy takes a turn for the worse. This segment can easily drive growth with contracts being up to million per year, with the flat subscriber growth actually being a consequence of lost small billings in exchange for large customers with great ASPs.
Discussion of TeamViewer’s Financials
The reason why the company isn’t performing so well on a stock basis is because of issues in profitability and a come-down from a very successful 2020. While the growth is very promising especially in enterprise, we are seeing a pretty massive increase in the marketing spending that is meaningfully bringing down margins, probably to sustain growth which received an impulse in 2020 from the pandemic without marketing efforts being required.
This increase in marketing expenses is coming from large sponsorship and advertising campaigns as well as marketing partnerships with major enterprise players like SAP that are bloating the line item. However, the company is guiding to the fact that there will be a new normal in marketing expense, but it seems that the reduced sales expenses evident in Q4 will persist and together with improving economics from growing enterprise revenue in the mix will be enough of an offset where margin is not guided to decline. Moreover, slowed growth in R&D on a go-forward basis after all the acquisitions have now been completed is also going to help the margin situation in 2022.
Moreover, the company is doing a buyback that is quite significant at these relatively depressed levels, signaling confidence in the business. The buyback is for 10% of outstanding shares.
Conclusions and Valuation
There is quite a bit of share-based compensation related to the Ubimax and Upskill acquisitions that is in part responsible for the pretty meaningful declines in operating profit and EBITDA.
Adjusting for those expenses and other which are not going to repeat, the decline in EBITDA is more modest, and the adjusted figure which we accept stands at 256 million EUR. The EV/EBITDA ends up at just over 11x.
We believe this is low for a high cash conversion subscription tech business with an AR angle in manufacturing.
Considering that the guidance checks out, with margins calming as R&D slows down and with enterprise continuing to grow in the mix in 2022, an improvement in EBITDA can even be expected. Certainly the growth in the topline can be expected as they continue to close major contracts with manufacturing clients and render the SMB segment increasingly unimportant, with this leg of the transition only having begun recently. With no outstanding share based compensation or other strange effects to speak of, and with the underperformance primarily being due to a fall-off from the pandemic impulse as well as this year’s lessened EBITDA due to the new marketing partnerships, the multiple suggests a company whose future isn’t very bright when it in fact is. We think it’s a buy at these levels.