Kaltura, Inc. (NASDAQ:KLTR) Q3 2023 Earnings Call Transcript

Kaltura, Inc. (NASDAQ:KLTR) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Good morning everyone and welcome to the Kaltura Third 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 third quarter ended September 30, 2023 and provide a business update. Yaron will then review in greater detail the financial results for the third quarter of 2023 followed by the company’s outlook for the fourth 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 September 30, 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 obligations 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’d 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 third quarter of 2023 of $43.5 million, up 6% year-over-year, and subscription revenue of $40.8 million, up 8% year-over-year. Adjusted EBITDA for the quarter was $0.3 million. For the fourth quarter in a row, we posted record subscription revenue, and our year-over-year total revenue growth rate was the highest since the first quarter of 2022. Subscription revenue represented 94% of total revenue, compared to 92% in Q3 2022. We are pleased to share that our keen focus on returning to profitability has proven fruitful, and that we achieved adjusted EBITDA profits for the first time since 2020.

In the third quarter, we also posted $1.7 million in cash flow from operations, the highest since the fourth quarter of 2020. Stabilizing our bottom line in cash burn has been our main goal for the year. We repeatedly stated that we have reported both positive adjusted EBITDA and cash flow from operations in 2019 and 2020, and that we had a plan to achieve it again. We are pleased to have achieved it again in the third quarter ahead of plan. We go on to the business update. In the third quarter, we secured a seven-digit deal with a new leading financial services customer, who has chosen Kaltura as their go-to platform for all their virtual and hybrid events. We also expanded our collaboration with two of the largest banks in the United States, including signing a seven-digit upsell deal with one of those banks.

Over the quarter, we continue to see growing demand for consolidation around Kaltura across a wide array of on-demand live and real-time video use cases for both employees, customers, and prospects. We continue to drive larger deals with new customers and expansions with existing ones. For example, a leading Fortune 500 tech customer that started working with Kaltura less than a year ago to power external events and marketing use cases, expanded this quarter with another seven-digit deal to also utilize Kaltura as their internal video portal for improved employee collaboration, knowledge sharing, and training. And a European university customer expanded this quarter beyond our video content management suite, connected to their LMS, to also utilize a real-time conferencing virtual classroom solution to enrich their hybrid and remote learning experiences.

From a marketing perspective, last week we hosted our third annual virtually live event, our own virtual event for marketing and event professionals, focused on discussing how to best reach and excite audiences through virtual and hybrid events, including leveraging innovative AI tools. It was a huge success with thousands of registrants. We had insightful fireside chats and panel discussions featuring leading minds from the marketing world, including senior leaders from Kaltura customers such as AWS, VMware, Adobe, SAP, and Salesforce, which is a new 2023 customer that uses Kaltura to power live and on-demand videos in Salesforce Plus in order to, among other things, provide the online experience for large events like Dreamforce, which took place this passing quarter and was a huge success.

This year’s Virtually Live included a showcase of our latest AI-focused product releases, including crowd reactions, AI-based content discovery, and our new event AI assistant, which I will talk about later. Discussions revolved around enhancing ROI, strengthening brands, and building robust pipelines. We also dedicated significant attention to sustainability, diversity, equity, and inclusion, acknowledging their growing importance in the marketing landscape. Underlying all discussions was the transformative potential of AI in marketing. We explored how AI is revolutionizing the game for marketers and how its ongoing evolution will continue to impact all of us in the industry. While on the topic of AI and moving to product updates, we’ve started bringing AI offerings to market.

Salesforce Plus incorporated Kaltura-powered AI enrichment services for content repurposing in alignment with our AI-forward Einstein focus, particularly for events. Salesforce leveraged Kaltura’s AI to create automatic summaries and key takeaways for over 300 Dreamforce sessions, providing great value to attendees and saving their marketers and event organizers countless hours. In addition, another leading Silicon Valley technology company went live this quarter with a pilot program that utilizes Kaltura powered generative AI tools to rapidly produce on-the-fly, highly targeted, short-form video content, and automatically publish it across many distribution channels. This quarter, Kaltura also released an AI assistant that streamlines the process of setting up webinars, providing users with intelligence suggestions and automated actions to increase the efficacy of event management.

Soon, we plan to expand the AI assistant to provide insights and suggested actions to organizers and presenters during webinars and other events, from recommending audience engagement strategies to providing real-time performance metrics. We believe this assistant will be a valuable tool for optimizing the event experience and maximizing the impact of each session. We also added an AI-powered chatbot to our media and telecom cloud TV offering. Our new Kaltura TV genie now engages TV viewers with tailored content suggestions. Lastly on AI, we kicked off in the passing quarter the Kaltura AI accelerator program with the goal of integrating the best Gen-AI third-party technologies with an open and flexible platform. We are already engaged with 15 pioneering Gen-AI startups that specialize in diverse fields such as video creation, editing, repurposing, and analysis.

Over 10 large Kaltura customers across various industries have shown interest in these solutions for their specific use case and needs. We are excited about the great opportunity that the AI accelerator program can bring to our customers and to the wider tech ecosystem. Beyond AI, during the quarter on the E&P product front, we introduced more event platforms features aimed at enhancing engagement in ROI. These include a new dashboard for session analytics, interactive quick polls, improved recording management, and deeper integration with our video portal. We also added a connector to Salesforce CRM, a new HubSpot integration, and a theme editor for customization. On the M&P products front, we integrated new ad-supported fast channels and server-side ad insertion capabilities designed to allow us to broaden the target segment of our Kaltura streaming platform to media companies who want to syndicate their content to third-party platforms like LG, Samsung, Amazon Prime, and Roku.

Before I summarize and hand the call over to Yaron, I would like to briefly comment on the recent escalation in the Middle East. Kaltura is a U.S. domicile company that operates in many countries, including Israel, where we have a sizable presence. We are heartbroken and our thoughts and prayers go out to our Israeli Kalturans and their families and to everyone else that has been impacted. Approximately 10% of our Israel-based workforce, which is approximately 5% of our global workforce has been called up for reserve duty. And we are prioritizing and allocating resources between projects to mitigate any impact to our business. To-date, we’ve not seen any disruption to our ability to deliver products and services to our customers. In summary, in the third quarter, we achieved an important milestone in our journey back to profitability, boosting both positive adjusted EBITDA and positive cash flow from operations.

Given the quarterly results, we are slightly increasing our subscription and total revenue guidance for the full year. While top of the sales funnel KPIs, like the number of new qualified leads grew sequentially, underscoring the interest in Kaltura’s comprehensive offering, the industry headwinds we have been discussing in recent quarters have continued to weigh down on both new deals and renewals. Lower budgets, increased price pressure, and elongated sales cycles have kept new bookings relatively flat throughout this year, and have ticked down gross retention levels. As a result, we continue to forecast the combined impact will create a headwind through revenue in the fourth quarter, which is reflected in our guidance. We are raising our adjusted EBITDA guidance for the full year, setting the middle of the range at negative $4.3 million compared with negative $28.3 million in 2022.

We’re also restating again our expectation of boasting a positive adjusted EBITDA in 2024. And lastly, we are reaffirming once again our expectation to achieve positive cash flow from operations for the second half of 2023. This translates into a maximum forecasted annual cash consumption from operations of $11.5 million compared with $46.8 million in 2022. We’re also reaffirming that following the typical seasonal greater cash losses in the first half of next year, we expect to arrive at cash flow from operations breakeven by the second half of 2024 with sufficient cash reserves. 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 third quarter results today, please note that I will be referring to a non-GAAP metric adjusted EBITDA. The reconsideration of GAAP and non-GAAP financials is included in today’s earnings release, which is available on our website at www.investors.kaltura.com. Total revenue for the third quarter ended September 30th, 2023, was $43.5 million up 6% year-over-year. Subscription revenue was $40.8 million up 8% year-over-year, while professional services revenue contributed $2.7 million down 14% year-over-year. The remaining performance obligation were $164 million, down 3% year-over-year, of which we expect to recognize 59% as a revenue over the next 12 months.

Annualized recurring revenue was $163.1 million, up 7% year-over-year. Our net dollar retention rate was 101% in the third quarter compared with 96% in Q3, 2022. Within our E&P segment, total revenue for the third quarter was $31.1 million, up 3% year-over-year. Subscription revenue was $30 million up 5% year-over-year, while professional services revenue contributed $1.1 million, down 24% year-over-year. Within our M&P segment, total revenue for the third quarter was $12.4 million, representing 13% year-over-year growth. Subscription revenue was $10.8 million, up 17% year-over-year, while professional services revenue contributed $1.6 million, down 6% year-over-year. GAAP growth profit for the quarter was $27.7 million, representing a gross margin of 64%.

Within our E&P segment, gross profit for the third quarter was $22.8 million, representing a gross margin of 73%, up from 71% growth margin in Q3 2022. Within our M&P segment, gross profit for the third quarter was $4.9 million [ph], representing a growth margin of 40%, down from 47% growth margin in Q3 2022. GAAP net loss for the quarter was $8.3 million or $0.08 per diluted share. Adjusted EBITDA for the quarter was positive $0.3 million, improving from a negative $7.2 million in Q3 2022. Turning to the balance sheet and cash flow. We ended the quarter with $71.1 million in cash and marketable securities. Net cash provided by operating activity was $1.7 million in the quarter compared to $1.1 million provided in Q3 2022. I would now like to turn to our outlook for the fourth quarter of 2023 and for the fiscal year ending December 31, 2023.

In the fourth quarter, we expect subscription revenue to be between 3% decline to 1% growth to between $38.4 million and $39.8 million, and total revenue to decrease by 7% to 4% to between $40.8 million and $42.3 million. We expect negative adjusted EBITDA to be between $0.6 million and $1.1 million. For the full year, we expect subscription revenue to grow by 5% to 6% to between $160.3 million and $161.7 million, and total revenue to grow by about 2% to between $171.5 million and $173 million. We expect for the full year a negative adjusted EBITDA to be between $4 million and $4.5 million. In summary, despite the macro environment and our industry headwinds, we are slightly increasing our total revenue, substitution revenue, and adjusted EBITDA guidance for the rest of the year, and reaffirming our focus to achieving a positive cash flow from operation for the second half of 2023.

Lastly, we are reaffirming our expectation to a positive and adjusted EBITDA in 2024 and to achieving a cash flow from operations breakeven by the second half of 2024 with sufficient cash reserves independent of our top line growth. With that, we will open the call to questions. Operator?

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Q&A Session

Operator: Yes, thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] And the first question comes from Gabriella Borges with Goldman Sachs.

Jake Titleman: Thanks for taking my question. This is Jake Titleman on for Gabriella. Our thoughts are with you and all the Kaltura employees on the ground in Israel. On subscription revenue, which has grown sequentially for the last four quarters, what has changed in the macro environment that’s resulting in the negative sequential growth guide for the fourth quarter?

Ron Yekutiel: Thank you, Jake, and I appreciate your comments about Israel. Nothing has changed. By the way, we’ve said last quarter that that was expected to happen, and that’s because of the booking versus gross retention in the last couple of quarters already. So that continued. You can see that the general direction is not very different than we had said last quarter. But let me give you a bit more insight around where business was and is to give you a bit more background around where we feel things are. So first, in this quarter, most contribution came from upsells versus new logos and was still headed by enterprise and also headed by North America. You could see there’s a bit more heat on the European side, but we have financial pressure.

There’s continued increase in demand for our event platform, and especially our external marketing use cases. Now, that’s something that’s not new. Again, we’ve been discussing this in recent years as we’ve moved from internal to also external, and earlier we referred to a seven-digit deal with a new customer that’s one of the largest investment firms in the world, and they moved to us from a competitor to power all their marketing communication events. We’re getting a lot more on that. So that continues. We also continue to see companies consolidate around Kaltura, and so you’re seeing both internal and external cases, which is unique for us. Half of our RFPs where we responded this quarter were combined internal and external, and the ARPU continues to grow.

And we also mentioned earlier about another seven-digit deal with an existing Fortune 500 tech company that signed with us, and they expanded from external into internal, sometimes it’s the other way around, and they grew their accounts to 2.5x the initial value. That’s also typical. Win rates continue to be high this quarter, by the way, higher than all quarters last year, so the change isn’t the percent of the deal that we win versus lose. Again, how many actually make it to the final process. And we also had a higher percent of booking this quarter compared to usual from channels. It’s generally been choppy now. It’s deep into the double-digit, and we had two quite large channel drop competitors and we start working with us this quarter, and we expect it to impact future quarters as well.

We saw a less percent booking from professional services. We know that. That’s continued to pressure our PS revenue down, which is not amazing for the short term, but good for the mid-to-long term. It increases our TAM, accelerating our sales deployment cycle. It does well to gross margins, so that’s good. But we’re still seeing good top-of-the-funnel signs. I mentioned the number of new TBMs in the quarter that grew sequentially, and also SBR meetings are generally low in Q3 because of the summer, but it was better year-over-year. So, all these are the good signs to your question about the dip. We’re still seeing the industry headwinds. We reported on that earlier in the year. Still longer sales cycles, still reduced budgets, still price pressures.

That means the deals get delayed again. The result is kind of a flat-ish new booking this quarter compared to Q1 and Q2, and it’s at lower levels than last year, about 25% less. So bookings are a bit lower. I would note, though, that the productivity isn’t lower. We have now two-thirds of the salespeople that we had a year ago, so bookings are less by 25%, but we have two-thirds of the salespeople that means that on average, we’re actually selling better per salesperson. And so that’s – the combination of that we could talk later about retention had pushed us a bit down, but we believe that the macro conditions are going to start improving. The headwinds are going to settle down. Productivity is expected to go up. And generally speaking, we – based on existing business, already see that compression that we’re seeing in Q4 is not expected to continue to Q1.

It’s based on already deals that are in pocket. That’s a lengthy answer, but it gives you a feel for the businesses. Does that address your question?

Jake Titleman: Absolutely. Thanks. That’s super helpful color. And then maybe one for Yaron, and I realize that you’re not going to provide 2024 guidance on this call. But if we look at the exit rate that’s implied for Q4, how should we think about, like, planning for 2024 numbers at this point?

Yaron Garmazi: Thank you for the question. The one important comment as Ron mentioned that, first of all, the decline that we projected, and we projected it before in Q4 revenue. We don’t see it continuing to Q1 2024. So it’s definitely change direction. The way that you should look on 2024 is that at this point, we see that the subscription revenue will continue to grow. It’s too early to give you the exact number and the rate that it’s continued to grow. But at the same time, we will continue to see declining the professional services revenue. So net-net, we still want to close the quarter. We want to see the trends in terms of booking and retention rate. But to make a long story short, we see the subscription revenue continue to grow into next year and probably some more pressure that we saw before on the professional services.

Jake Titleman: Thank you and good luck.

Yaron Garmazi: Thank you.

Operator: Thank you. And the next question comes from Ryan Koontz with Needham & Company.

Ryan Koontz: It’s a question on your AI developments, Ron, can you kind of walk us through some of your strategy there on build versus buy? Are you partnering for some of these? I’m certainly enthused about the kind of ecosystem partners you’re bringing to bear. But on the new AI features you’re rolling out, can you walk us through how much of that you’re sourcing internally versus partnering? Thanks.

Ron Yekutiel: Sure. Happy to do that, Ryan. So yes, we said that in the last couple of quarters that AI is definitely an important direction for us. Now, part of the benefit of Kaltura is that we have almost all the layered cake and the AI would complete it, because we are running workflow integration deep into the workflows. And we have the metadata, so the data itself is owned by us or managed by us on behalf of the customers. And then if you add on top of that the AI, we also own the last layer, which is the engagement layer because we’re a system of engagement. So if you have the integration all the way to the workflow together with the data that could be prompted into the AI and then used immediately into the engagement, then you have yourself a full loop.

And the vision that we said from the beginning is that we have several levels of work that we want to do. Some things are going to be around the video but not immediately touching video. So things like summarization of texts pertaining to videos or help around preparation or execution of a virtual event around lead management or messaging or speaker lists or recommendations. So things like this could be actually used off-the-shelf with existing APIs that are out there for ChatGPT and otherwise. And the things that are more exciting for us that we want to either own by way of building from our existing people and/or maybe even M&A type activities that we’re looking at options or whatever, are things pertaining to compressing the breadth of different providers around creation and consumption and distribution of video.

Historically, and I said that last time, there have been different technology vendors that were addressing the creation of video, the production of video, the post-production of video to those that were dealing with the distribution and engagement. And we see the future as one system that creates the videos, distributes them. Meaning, that you could have highly personalized, highly interactive videos that are made on the fly to cater to specific context and specific users, and then adopting on the way in order to maximize ROI, whether it is training or marketing. So this is a big focus for us as we go forward. Right now what we’ve launched, we mentioned a leading Silicon Valley company that’s launched with us, that was around the short form content distribution together with repurposing up the content in order to address specific needs.