Kaltura, Inc. (NASDAQ:KLTR) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good morning, everyone and welcome to the Kaltura First Quarter 2023 Earnings Call. All material contained in the webcast is the sole property and copyright of Kaltura with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

Erica Mannion: Thank you, and good morning. With me today from Kaltura are Ron Yekutiel, Co-Founder, Chairman and Chief Executive Officer; and Yaron Garmazi, Chief Financial Officer. Ron will begin with a summary of the results for the first quarter ended March 31, 2023, and provide a business update. Yaron will then review in greater detail the financial results for the first quarter of 2023, followed by the company’s outlook for the second quarter and full year of 2023. We will then open the call for questions. Please note that this call will include forward-looking statements within the meaning of the federal securities laws, including, but not limited to statements regarding Kaltura’s expected future financial results and management’s expectations and plans for the business.

These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Important factors that could cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Kaltura’s annual report on Form 10-K for the fiscal year ended December 31, 2022, and other SEC filings, including the quarterly report on Form 10-Q for the quarter ended March 31, 2023 to be filed with the SEC. Any forward-looking statements made in this conference call, including responses to your questions are based on current expectations as of today, and Kaltura assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law.

Please note, we will be discussing a non-GAAP financial measure, adjusted EBITDA during this call. For a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP metric, please refer to our earnings release, which is available on our website at www.investors.kaltura.com. Now, I would like to turn the call over to Ron.

Ron Yekutiel : Thank you, Erica and thanks to everyone for joining us on the call this morning. Today we reported total revenue for the first quarter of 2023 of $43.3 million, up 4% year-over-year and subscription revenue of $40.4 million, up 9% year-over-year. Adjusted EBITDA for the quarter was negative $2.7 million. This quarter we posted record subscription revenue and our year-over-year total and subscription revenue growth rates were the highest since the first quarter of 2021. Subscription revenue represented a record 93% of total revenue, up from 89% in quarter one 2022, as our revenues from professional services continue to decrease due to our increased productization and evolution towards low-touch products. We’re also encouraged to see our net dollar retention improve as predicted.

While we do not provide a formal forecast for this KPI and it may still fluctuate, we believe it will continue to do better than what it was in the second half of last year. We continue to focus on our plan to return to profitable growth and achieve the lowest adjusted EBITDA loss of the last six quarters. Once again, we reaffirm our goal of achieving a single digit adjusted EBITDA dollar loss in 2023 and a positive adjusted EBITDA in 2024. Regarding cash flow, we materially reduced our cash consumption from operations in this quarter to $7.4 million compared with $19.6 million in quarter one 2022. As we discussed in our last call, we believe the majority of our expected cash consumption from operations for the year occurred in the first quarter due to typical seasonality and the partial impact of our January budget cuts.

We expect a significant improvement in our cash flow in the next three quarters and to achieve cash flow from operations breakeven during 2024 with sufficient cash reserves. As stated before, we were adjusted EBITDA and cash flow from operations profitable in 2019 and in 2020 and are committed to the goal of getting there again soon independent of our top-line growth. Moving on to business updates. We continue to benefit from the secular trends shifting business processes from physical to online and personal interactions from in-person to remote. This is leading to the full digital transformation of companies and industries with video increasingly playing mission-critical roles. This new world with video at its center requires new engagement models with customers and new skill sets for employees.

For example, this quarter one of the largest banks in the U.S. launched a remote wealth advisory service based on Kaltura’s platform. We empowered the bank’s financial consultants to connect in a more meaningful digital way with their prospects and customers, enabling them to improve their reach and effectiveness by easily producing, approving and sharing videos and incorporating them into events and seminars. We also continued to see new and existing customers consolidate around Kaltura’s single flexible platform that uniquely caters to all video needs, including internal and external use cases and all types of video delivery, on-demand, live and real-time. Many companies use different platforms and vendors to power for example their video content management and portals, internal events, training and town halls and external events and webinars.

A recent Forrester webinar stated that 60% of organizations are even using multiple providers to just power their events, some as many as seven different providers. Companies increasingly appreciate the great value in consolidating around a single vendor. This reduces unnecessary complexities, streamlines workflows, eliminates content silos, and is far more economical and therefore especially appealing in today’s challenging financial environment. While the first quarter is typically our softest for new ARR bookings and we expect this year to be no different, bookings grew compared to the same quarter last year, despite having fewer RAM quota carrying salespeople. This translates to a meaningful sales productivity improvement. This also marks our second consecutive quarter with higher new bookings compared to a year ago, following five earlier quarters of year-over-year new ARR booking declines.

The biggest contributor to new business this quarter continued to be the enterprise segment, in which half of our new ARR bookings came from new customers, which is more than recent quarters. The increase was not just in new customers, but also in our average deal size, mostly thanks to the broadening of our product portfolio in both our E&T and M&T segments. To that end, this quarter we closed five seven-digit contracts with insurance, banking, tech and media companies, four of them new customers. Our sales pipeline for the rest of the year is growing with great opportunities across all sectors. We see leading indicators of support and expected continued growth in new bookings, including growth in the number of sales meetings set by our SDRs and in the number of our RFP submissions compared to the numbers in the second half of 2022.

We’re also boosting our marketing activities this June with the relaunch of our physical industry event for the first time since 2020 pre-COVID. This time we decided to get closer than ever to the market with a series of five events that will take place in New York, San Francisco, Atlanta, London, and Berlin. In Kaltura Connect on the Road 2023, we will discuss how to achieve greater engagements, improve learning, training and collaboration, and increase leads adoption and retention with fewer resources using advanced video experiences. Attendees, including marketing, training, learning, IT professionals and event technologists will hear from top industry speakers and participate in workshops geared towards creating action plans for increasing return on investment through meaningful engaging digital interactions.

Lastly, on the product development front, during the first quarter we continue to evolve our events platform, our webinars products, and our APIs and developer tools. We introduced a set of advanced capabilities that make complex events easier to launch and operate, further reducing the need for services. These include single sign-on templates, custom metadata support, and automated certification workflows for continued professional education. We also expanded usage and session analytics and enhance our integrations with marketing automation systems. We also launched several capabilities that increase the benefit of consolidating our end-to-end to power all video types and needs, on-demand, live and real-time video types for internal and external needs.

For example, we launched the ability to aggregate user data across all Kaltura products, including events, webinars, and video portals, which now enables customers to collect, present and gather user profile and insights across all products to further increase personalization, interactivity, engagement and return on investment. Whereas another example, we launched a new showcase page where all customer events and webinars, past and upcoming are visible. This allows customers to share their full event schedule and consolidate all their event content in a single easy-to-find location that can be embedded anywhere. On the media and telecom front, we continue to enhance and expand the footprint of our front-end TV application for over-the-top setup boxes, Smart TVs and connected devices which launched commercially for the first time last quarter, and is now already live with four TV operators.

By adding a set of front-end experience applications to our back-end platform, we’re now able to provide an end-to-end TV offering for our media and telecom customers. This increases our average deal size and strengthens our competitive positioning and stickiness and also enables future introduction of additional revenue streams from user insights and advertising. In summary, the results of the first quarter allow us to remain cautiously optimistic about the rest of 2023. While some of the industry headwinds that we experienced in 2022 are still present and we see customers continue to tighten budgets and delay purchases, we are encouraged to see early indicators of improved market demands, translating to a year-over-year growth in Salesforce productivity and new bookings.

And our expanding product portfolio is encouraging companies to consolidate around Kaltura, especially in the current financial climate, which has resulted in an increase in our average deal size. We’ve made progress towards improving our adjusted EBITDA and cash flows from operations in the first quarter and remain committed to the goal of returning to profitable growth. As I mentioned, we believe that most of the cash flow from operations burn for the year is already behind us and we are reaffirming our forecast for a single-digit adjusted EBITDA loss this year, into achieving a positive adjusted EBITDA and cash flow from operations breakeven in 2024. With that, I’ll turn it over to Yaron, our CFO, to discuss our financial results in more detail.

Yaron.

Yaron Garmazi: Thank you, Ron, and good morning everyone. As I review the first quarter results today, please note that I will be referring to a non-GAAP metric adjusted EBITDA. A reconciliation of GAAP and non-GAAP financials, included in today’s earnings release, which is available on our website at www.investors.kaltura.com. Total revenue for the first quarter ended March 31, 2023 was $43.3 million, up 4% year-over-year. Subscription revenue was $40.4 million, up 9% year-over-year, while professional and services revenue contributed $2.9 million, down 39% year-over-year. The remaining performance obligations were $167.4 million, down 2% year-over-year, of which we expect to recognize 58% as revenue over the next 12 months.

Annualized recurring revenue was $159.6 million, up 8% year-over-year. Our net dollar retention rate was 102% in the first quarter, the highest since Q1, 2022. Within our EE&T segment, total revenue for the first quarter was $31.3 million, up 5% year-over-year. Subscription revenue was $29.9 million, up 8% year-over-year, while professional services revenue contributed $1.5 million, down 31% year-over-year. Within our EE&T segment, total revenue for the first quarter was $11.9 million flat year-over-year. Subscription revenue was $10.5 million, up 12% year-over-year, while professional services revenue contributed $1.4 million, down 45% year-over-year. GAAP gross profit for the quarter was $27.3 million, representing a gross margin of 63%, the same gross margin as in Q1, 2022.

Within our EE&T segment, gross profit for the first quarter was $22.8 million, representing a gross margin of 73%, up from 70% gross margin in Q1, 2022. Within our M&T segment, gross profit for the first quarter was $4.5 million, representing a gross margin of 38%, down from 46% gross margin in Q1, 2022. GAAP net loss in the quarter was $12.8 million or 0.09 per diluted share. Adjusted EBITDA for the quarter was a negative of $2.7 million, improving from a negative of $8.4 million in Q1 2022. Turning to the balance sheet and cash flow, we ended the quarter with $77 million in cash and marketable securities. Net cash used in operating activities was $7.4 million in the quarter, compared to $19.6 million in Q1, 2022. I would like now to turn to our outlook for the second quarter of 2023 and for the fiscal year ending December 31, 2023.

In the second quarter, we expect subscription revenue to grow by 5% to 7% to between $39.9 million and $40.6 million, and total revenue to increase by 2% to 4%, to between $42.8 million and $43.7 million. We expect a negative adjusted EBITDA between $1.5 million and $2.5 million. For the full year, we expect subscription revenue to grow by 4% to 6% to between $158.6 million and $161.7 million, and total revenue to grow by 0% to 2%, to between $168.8 million and $172.2 million. We expect the full year negative adjusted EBITDA to be between $5 million and $8 million. In summary, though we are still encountering industry headwinds, we met our internal expectations of booking, retention, revenue, profitability and cash flow for this quarter. And in light of the early indicators of improved market demand that Ron spoke about, I am cautiously optimistic about the rest of 2023.

We expect revenue from professional services to continue to decrease and subscription revenue to continue to grow faster than our total revenue. Notwithstanding our top-line growth, we remain firmly committed to our goal of returning to profitability. This means meeting this year’s single-digit negative adjusted EBITDA forecast and positive adjusted EBITDA next year. As for cash burn, we believe that most of this year’s cash flow from operation losses are already behind us, and we plan also to achieve a cash flow from operations break-even during 2024 with sufficient cash reserves. With that, we will open the call for question. Operator.

Q&A Session

Operator: Thank you. [Operator Instructions]. Your first question comes from Gabriela Borges with Goldman Sachs. Please go ahead.

Operator: Your next question comes from Matt Niknam with Deutsche Bank. Please go ahead.

Operator: Your next question comes from George Iwanyc with Oppenheimer. Please go ahead.

A – Ron Yekutiel: When you say investment case, could you clarify it for us?

Operator: Your next question comes from Michael Turrin with Wells Fargo. Please go ahead.

A – Ron Yekutiel: Yeah, a great question. Obviously generative AI is a very, very interesting and important progress in our industry. I mean generally AI is a big, big disruptor and will make a lot of changes as we all know in the months and years to come. And yes, we’re looking at it very seriously. I think that the value of Kaltura as a platform that goes horizontally and goes deeply into the workflows, enables us to utilize things like AI in a much better and stronger way than most, because what we provide is very clear ROI and videos used as a mean for an end, not just as an end. It’s not just a video for the sake of video. It’s video for learning, video for marketing, video for sales, video for events, video for increasing leads and we’ll be discussing a lot of that in the upcoming Kaltura Connect conferences.

And so while until now we’ve had very strong BI and very good analytics. We also announced that this quarter we made them interconnected across all our products such that you could gather insights around individual users across all the different places. It’s ripe to go to the next step and turn this from BI into AI and there’s various ways in which we are considering and planning to get this done. But frankly, if this couple of years would have been stronger and better, we would have already done it. It was in our to-do list as the next big, important item. But we’re monitoring our progress and spend accordingly and so far as where we’re putting the budgets. But it is an important, important area for us. We think that ideally, content could be created on the fly, targeted to the right people and the right context on the fly and then the feedback loop closes with a user behavior, and we are there as a leading distribution platform, in some cases started going up to become the creation platform and we think we could own the entire flow of video, the entire shelf life and lifecycle of video from creation to consumption through targeting, with improving AI and BI.

So thanks for the question. It’s an important area for us.

Operator: Your next question comes from DJ Hynes with Canaccord. Please go ahead.

Operator: Your next question comes from Tom Blakey with KeyBanc Capital Markets. Please go ahead.

A – Ron Yekutiel: I’ll just add, that the first quarter, and we said that all the time, is not a strong quarter for any of the years that we’ve been around, and so while we did well, it’s not one that would cause us to change everything we think because of that. It’s early in the year, especially in this crazy year. And therefore, we need to take it easy and see where things go. It doesn’t change how the world looks. It definitely doesn’t take it back, but for us we weren’t comfortable enough right now to get forward. Hopefully, whatever cushions we had in place, they are still there and definitely the fact that we’re a quarter in means that we are even safer and that we have good visibility, but we don’t want to raise the bar and we’re not expecting you guys to raise the bar if you may, because we just want to move forward, continue executing and deliver good results.

Operator: Your next question comes from Pat Walravens with JMP. Please go ahead.

Operator: There are no further questions at this time. Please proceed.

Ron Yekutiel : Okay. It sounds like we’re all done. I want to thank you all for the call and great questions. I wish everybody good health. I think, you know as I said, the general industry tailwinds and headwinds were clear, but also from a company perspective, we feel that we have greater visibility and more comfort on the numbers that we’ve provided for the year. And we’re moving forward thoughtfully with all the areas of growth as we have mentioned earlier. Thanks again. Have a beautiful day. Bye-bye.

Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.