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TeamViewer Stock – It’s Not Us, It’s You

December 28. 2024. 5 mins read

Blossom Ventures recently read through around 70 SaaS Q3-2024 earnings transcripts and concluded that, “companies focusing on value-driven solutions and ROI-driven platforms are best positioned.” If a solution saves a company money, they’ll likely adopt it more widely and increase spending over time. We measure this using a metric called net retention rate or NRR. And the last time we looked at TeamViewer (TMV:DE) we said they need to show “more value for existing customers because it’s always easier to upsell an existing customer than go find a new one.” Today, we see their NRR dipping below 100% which means customers are spending less over time. Not good.

Is it time to breakup with TeamViewer stock?

Is TeamViewer Stock a Growth Stock?

Click for TeamViewer company website

You cannot be disrupting if you aren’t growing. In our last webinar, we talked about jettisoning “growth-value hybrids” from our disruptive tech portfolio if they’re not showing at least double-digit revenue growth. Here’s how TeamViewer’s has progressed over the past five years with revenue growth slowing this year to mid-single digits (based on the narrow guidance range provided last quarter).

Bar chart showing TeamViewer revenues 2019-2024
Credit: Nanalyze

Double-digit growth has been consistent up until recently, and the company might explain that away with their strategy shift – a focus on growing the enterprise segment as opposed to small and medium-sized businesses. Nothing wrong with that, and they’re even starting to look more “SaaSy.” The latest quarterly deck distills revenues into a single “annualized recurring revenue” number which shows slow steady growth over time. However, existing customers are spending less as “net retention rate” dips below 100%.

Table showing decreasing Net Retention Rate for TeamViewer
Read this from right to left – Credit: TeamViewer

The above ARR number nearly reflects the estimated revenues for 2024 – 665 million euros – so we’re now able to treat this investment as a software-as-aservice (SaaS) business with accompanying metrics. Enterprise numbers are broken out to show this segment is growing faster than the overall business which points to the success of their strategic focus on larger clients. And just recently, they announced the acquisition of 1E that’s “expected to generate strong revenue synergies.”

TeamViewer Acquires 1E

To understand 1E we need to become acquainted with a new term – digital employee experience (DEX) – which we would describe as the interface between a company’s employees and the software and devices they interact with at their place of employment. You always want to reduce friction and make sure everything gets updated automatically. If you’ve ever worked in a corporation, then the experience you had using “helpdesk” is what DEX aims to improve. Gartner describes DEX as, “tools that continuously identify opportunities to improve the digital employee experience based on usage and performance data,” and their DEX Magic Quadrant lists 1E as a leader in this space with the second-largest market share.

Magic Quadrant for Digital Employee Experience Management tools
Credit: Gartner

All these solutions tout their ability to interface with ServiceNow (NOW), and 1E also mentions direct integrations with two other firms we cover – Datadog (DDOG) and PagerDuty (PD). That’s important to note because ServiceNow is getting into the DEX game with their own offering that became generally available in May 2024. Says Gartner:

ServiceNow did not meet the inclusion criteria for calculating and displaying a DEX or health score, and offering a predefined library of scripts and self-healing automations. These are on the vendor’s near-term roadmap.

So, while 1E has “on average delivered double-digit profitable revenue growth over the past three years,” that may come under pressure as ServiceNow starts to cannibalize the many vendors who offer DEX solutions via their platform. The pervasive mentions of ServiceNow integrations in the Gartner report implies this represents a significant amount of revenue exposure for vendors. This underscores the importance of not investing in companies that build their entire offering around someone else’s platform.

TeamViewer and 1E

Let’s put aside the potential ServiceNow threat and examine the benefits 1E might bring to TeamViewer’s table. The acquisition – expected to close in early 2025 – is said to be “cash free and debt free,” though that’s somewhat deceptive. They go on to say, “financing will be provided via existing credit lines and new debt instruments,” and the below chart from their latest earnings deck shows various revolving credit facilities (RCFs) that amount to 525 million euros while the enterprise value of the acquisition is 686 million euros.

Chart from TeamViewer's latest earnings deck shows various revolving credit facilities (RCFs) that amount to 525 million euros while the enterprise value of the acquisition is 686 million euros.
Credit: TeamViewer

TeamViewer acknowledges the debt risk by saying that the “net leverage ratio is expected to be around 3.3x” once the deal closes, and they want to bring that “under 2.0x by the end of FY 2026.” Presumably, they’ll be doing that by directing free cash flows towards debt instead of buying back shares. (Remember, this is an extremely profitable business with over 80% gross margins.) Additionally, synergies can be realized with the newly acquired companies as they merge overhead costs.

Regarding revenue synergies, we’re told 1E has annual recurring revenue of 74 million euros (as of September 2024) and more than 99% of the sales coming from enterprise customers. Assuming TeamViewer’s run rate of 669 million euros that implies a 11% boost for 2024.

TeamViewer stock is trading at all-time lows following the announcement which implies that the market isn’t looking too favorably upon the transaction. While many of the competing names in this space are owned by private equity firms or privately held, TeamViewer might have a tough time further consolidating their position given their debt constraints.

You might be wondering what DEX has to do with IoT connectivity, one of the reasons we invested in TeamViewer in the first place. That’s a great question.

Should We Stay or Should We Go

We would invest in TeamViewer on the assumption that IoT connectivity will be a dominant part of their business going forward – Nanalyze, 2020

We exit a stock for two reasons – if revenue growth stalls or if our thesis changes. We originally invested in TeamViewer because we expected them to “benefit from the long-term IoT connectivity thesis” which McKinsey described as one of the IoT technology layers that has the most growth potential. In fact, we’ve classified the holding in our portfolio as “IoT Connectivity” though we acknowledged “limited insights into the progress they’re making” relating to that thesis.

Also pertinent to our IoT thesis was the integration of augmented reality (AR) solutions where every hardware device becomes a digital twin and is serviced via augmented reality hardware leading to that futuristic vision of perfect digital harmony between human and machine. Last year we noted that management is implying that AR contributions aren’t growing at the rate they should be. And when they say, “but obviously we intend to develop that nicely going forward,” that just isn’t good enough.

The acquisition of 1E leads away from the IoT and AR thesis, while the lack of progress in that area means that our thesis is indeed changing. And what was one of the two reasons we exit a stock? Yes, when the thesis changes.

Conclusion

It’s important to document the reason why you invest in a company along with the reasons you would exit the position. TeamViewer is expanding their business in a direction that leads away from IoT connectivity. We might be able to overlook the expected single-digit growth for this year, but the acquisition of a leading DEX vendor means the company is moving in a different direction. Why invest in a vendor that’s reliant on ServiceNow when you can just invest in ServiceNow, a company that seems to be doing an excellent job in leveraging AI for growth? If we decide to break up with TeamViewer, Premium subscribers will be the first to know.

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  1. My experience with TeamViewer is not a pleasant one: following bulish Nanalyze article in Nov 2020 “TeamViewer ticks all the boxes when it comes to a business with growing diversified revenue streams by geography and client type” I have bought some and later I have bought more in April 2021.
    My avg purchase price was: 37.8 EUR. For comparison: the current share price is around 10 EUR.
    So I am -73%. Having that kind of loss makes no sense for me to sell it now.
    It makes more sense to wait for it to at least partially recover, especially as company is profitable: P/E=13.5. There was decent growth in revenue since 2020: 2020 revenue: EUR 455M, 2023 revenue: EUR 626M. So revenue growth is +37% in 3 years – not that bad.
    Not sure why the share price fell so much since 2021, taking into account company is profitable and had rather decent revenue growth (12% per year on average).

    1. We invest in companies, and this company has evolved over the years from one that we found attractive for reasons that were extensively documented to one that no longer is providing the exposures that we found attractive. While we could speculate on what the share price does in the future, the company isn’t attractive anymore for reasons described in this piece.

      Completely agree that it seems puzzling how the share price could fall so dramatically over the years based on the sound business they’re operating but a) that is probably the transition from growth to value and b) we gave up a long time ago on trying to figure out why volatile tech stocks move the way they do 😉