Kaltura, Inc. (KLTR) Earnings Call Transcript & Summary

In the Kaltura session this afternoon with us. I'm Michael Funk. I'm one of the SMID-cap software analyst at Bank of America. Very happy to have Yaron here with us this afternoon. I wanted to kick off the conversation, maybe higher level talking macro, and then we can dig in a bit more to the business. Before we do that there, I just want to set the stage, maybe the quick introduction of yourself and the company.

Okay. My name is Yaron Garmazi. I'm at Kaltura for the last 5 years. Kaltura is a software company, SaaS software company. We deliver video service, video experience, any type of video experience to any type of organization. Not like any other video companies, you will find that it's a very robust platform. We serve in 4 main go-to-markets. The first one is enterprise then education, tech OEM and media and telecom. We also report on the 2 segment, which is media and telecom and enterprise application and tech OEM. You will see by the end of the day that we are delivering a very nice growth rate for the business before COVID, during COVID. You don't hear us? Sorry for this.

While he's doing that, I'll go ahead and set the stage with the next question as well. So before we came in here, we were actually talking upstairs. And the discussion we were having was how quickly the market has shifted from a dominant focus on revenue growth in 2020 and 2021, and the market's eyes have moved further down the income statement and even to the cash flow statement now, which is very typical during this point in the market cycle. And so we're speaking about the potential or the levers that you can pull maybe to address some of the market concern around profitability and free cash flow. So maybe just kind of share with the audience what we were talking about earlier.

Yes. First of all, Kaltura went public exactly a year ago. If you look on the numbers of Kaltura before we went public, we were growing very nicely, 12%, 18%, 24%; and during COVID, all the way almost to 40%. Before we went public and before COVID, which obviously had some very nice tailwind that help us to grow faster than before, the company was still positive, profitable. And actually, if you see the main KPIs that we deliver and we present to the market as part of the S1, you will see that the LTV to CAC, for example, was growing from 5x to 11x -- to 7x and all the way to 11x. This is before COVID and in the third [ period ] of COVID, meaning that with such a strong KPI, we can take the company to a very positive territory in terms of bottom line. We took the decision during the IPO process and especially with the opportunity that we have ahead of us to invest heavily in sales and marketing, R&D, but mostly in sales and marketing because there is a huge opportunity ahead of us that we want to capture right now. And then we took the company all the way from a positive adjusted EBITDA before we went public. As I mentioned, while we were growing very nicely, all the way to adjusted EBITDA that's right now, the last guidance that we provided, was that we are going to lose around $30 million. Is it working fine? So people can hear me or not so much? [ Adam ] clamped me the mic. Sorry for that. But anyway, I hope that you capture most of what I said, but I will repeat the most important points. As I mentioned, the company was growing very nicely before COVID, without the tailwind of COVID, very strong KPI that we presented before the IPO of LTV to CAC of 5x that was growing to 7 and to 11x. With such a KPI, we could grow nicely but still to be positive. We took the decision to invest heavily in sales and marketing mostly but also in R&D to capture the opportunity that we have ahead of us, mostly around events, and we can elaborate later about the event platform that we introduced to the market. But -- and then we took the decision to take the company to a negative territory. In this year, it's going to be around $30 million negative adjusted EBITDA. But as I said, we need to take the decision when we want to balance it, but the long-term model is for sure a model that support a very nice growing business. We have a very nice bottom line attached to it. We proved it before, and we probably will take the decision sooner than later to go back to this path because most of the investment that we needed to do in sales and marketing, in R&D, most of it is behind us. We didn't guide it yet to a positive territory. We kept the same guidance for this year. But at some point sooner than later, we will probably change the trend and take it to a positive territory.

And to stick with that conversation for a second. I mean it sounds like you're thinking very carefully about prioritizing and investing for growth versus driving the profitability. What are the factors that are shaping that decision? We already talked about what the market is evaluating today. But internally, how are you weighing those factors as you think about either pushing forward investment or maybe pulling some of those levers and pulling back on sales and marketing and R&D?

Yes. After we went public, it was just a period between COVID, pre-COVID, post-COVID. One of the most important solutions that we introduced to the market was a virtual event solution that the first we went for the flagship, the big flagship events. And then we announced this year, like actually a month ago, the availability of the lower-level event platform, which can serve any type of organization, any size of event. We needed to invest in this product. So in terms of R&D, we invested heavily in the last couple of years in terms of this product and to make it a mature product. But at the same time, we needed to build a sales force, the right sizable sales force that really can support such a product, especially that we are selling to big organization, to big enterprise. We are not a self-serve solution. We're selling across the board just using the marketing expenses. And therefore, we did need to expand and to increase significantly the size of the sales force. We did most of it. If you ask me what is the situation right now, most of the R&D job has been done. We still need to invest going forward to continue to add features to the products. But most of the hard work has been done. And at some point sooner than later, we can decide to slow down the investment in R&D. At the same time, if you look on sales and marketing, we didn't got to the place that exactly we want to be in terms of the size of the organization. But at the same time, if we want to start think on balancing a little bit between growth rate to profitability, we can decide to take an action now and maybe to slow down. We didn't took this decision. But at this point, I would say that most of the investment, the heavy-lifting has been done. We will consider in the next few months when we want and if we want to slow down. But as I mentioned, the KPI, the main KPIs of the business are supporting a business that can grow very quickly to a positive territory. It's just a decision that we'll have to take. And by the way, we are very thoughtful to everything that is happening around us. We are listening to the recession discussions, inflation discussions. We can discuss it later. Maybe our solution is even a good solution for such a situation. But at this point, we decided to keep the guidance as it is. But definitely, in the short term, we will change direction and take the company to a positive territory.

And I want to get into more of the industry-specific discussion and then even inflation. But I just wanted to stick with this for 1 minute. Strategic options, I guess, is another route that a company could take if there was a disconnection between valuation and then actually the intrinsic value of the company and you're talking about very strong KPIs and growth potential in the future. Is Kaltura potentially worth more as part of a company with a larger product bundle that could potentially strip out synergies? Is that something the management team ever talks about or discusses?

Yes. First of all, if you look on Kaltura, Kaltura is a bit unique story. It's a platform story. And it's a platform story that from one end, we are serving media telecom companies and basically selling to them TV solutions. From the other end, we are a strong player that's selling from the industry solution. And at the same time, we are selling to big enterprise all solution starting from video management, all the way to webinars and then to virtual event, which go even to flagship virtual events. So if you ask me if somebody can take a platform and maybe can do acceleration to what we are doing, probably the answer is yes. If you are asking me if we are building now the company to sell it quickly, with this valuation and where we are right now, we are heads down, completely heads down to continue to build valuation, to continue to execute on a daily business. And we believe that if they -- if we build, they will come. If you ask me if synergy can exist in our story that maybe can help some of our even potential customers and partners that we are working right now, yes, for sure. We are working with guys like AWS on the biggest event. We announced, obviously, Oracle which using us for many solutions, virtual event, webinar, lecture capture, video management solution. So the short answer is, for sure, yes. But at this point, we are definitely focused heads down in executing and trying to leverage against what we can deliver to the market.

Yes. Thank you very much for going through a great overview of kind of some macro considerations. I know part of the story that you've been discussing, a lot of answering questions about was the COVID tailwind, right? And I think that's very evident and very apparent and that COVID certainly maybe drove a lot more inbound phone calls than you would have received otherwise. What we're not really talking about yet is the potential impact of the recession and how it might actually be a positive tailwind as companies think more about cost savings and how your video solutions can help them in that area. Can you just talk about customer conversations you might be having as they think about the recessionary impact in cost savings?

Yes. First of all, regarding your first comment on COVID, definitely, we felt the tailwind coming from COVID, especially during last year, 2020, and then mostly in 2021. Most of the focus, by the way, in the tailwind that we had was not that across our board, everybody has bought our solution like crazy. And then later, we faced a big general level. It is not the case. It was a specific tailwind that came mostly from the virtual events and some consumption upside. But COVID maybe behind us, maybe not. But I can tell you that in the discussion that we have right now with customers, especially big customers, they are looking for infrastructure solution that either can serve them to another situation like COVID but also to the world post-COVID, which is more like a hybrid solution, and nobody knows exactly what is the solution, and therefore, a platform that can be adjusted and a flexible platform is an interesting solution. And some of the discussion that we have right now is exactly on how they can build and use our solution to solve many issues that they have post-COVID which they are not sure by 100% how it's going to work. But something new that we started to feel which is around recession is that at the past, most of the people that were discussing with us and negotiating with us were either the CIOs of the companies or the CMOs of the companies. Suddenly, we start to see more even the CFOs involved, especially discussions around recession. So one can wonder that maybe in a recession, people will invest less in IP, but what we hear and what we feel more than the past is the people trying to think and to find solution that maybe make their organization more efficient and more cost-effective because of the recession and therefore, can I find a solution that can serve virtual event but not the type of virtual event like what we have right now, but any type of event for the organization, any type of gathering for the organization in order to make the organization much more efficient to save travel, hotels and stuff like this. This is a music that we didn't hear before, and we started to hear it more and more. So from one hand, there is the risk that maybe in a recession time, if there will be a recession, people will invest less in IP. But from the other hand, in our solution that can be very flexible, people can really use it to save and to be more efficient organization, which is also related to post-COVID situation.

And so you're saying you have these conversations with the new person in the room is now the CFO versus prior to last maybe few months. But is this resulting in deals signed? Are you seeing an uptick in bookings or signings? Or is this still just early-stage funnel where it's difficult to predict how that translates into bookings?

Yes. One thing that I should be very transparent, and we said it a few times also in our earnings call, cycles become longer post-COVID in terms of closing date, and people feel the pressure. From one hand, people are very cautious to find the right solution that can serve them too many years. They are not under any pressure to sign deals in a quick way. But at the same time, what we see right now, it's not so much that it's a full conversion of the discussion that maybe are more efficiency related. It's more like a discussion level right now and in a pipeline that's building very strongly. This type of deal that we see right now are much bigger than the type of deals that we were negotiating before, and the amount of deals that are north of 1 million, for example, SEB is much larger than what it was before. So hopefully, we'll be able, at some point sooner than later, to convert it to booking and revenue. At this point, it's definitely a wave that you start feeling but yet to be seen in the next few quarters.

Okay. And just to your comment on cycle time that's consistent with your earnings call last quarter, but are you seeing cycle times lengthen further as there's more uncertainty around the macro? Or is that still most strongly correlated with the size of the deals that you're negotiating?

It's mostly the type of dealers and the size of the deals. Before COVID, it was mostly a much smaller deal. Now we see much larger deal with much larger companies. The biggest companies on earth are trying to find an infrastructure solution for the long term, and it's mostly depends on the size of the deals and the type of customers. And these are customers that really want to find solution that can cover A to Z not just a specific area something that we felt in COVID. People came to us and asked us for a specific solution for the short term. Now it's more infrastructure discussion. But it's not longer than it was 2 or 3 months ago. It's the same trend that we see right now. But we also see a nice conversion of the pipe, but yet to be seen that it's really converted to revenue, which will impact, obviously, the growth of the company, even though we did guide a very nice sequential growth that come in the second part of the year.

I want to get back to the guidance for the year. But first, in your introduction comments, you were noting that you report the revenue from enterprise and then from education. And I think you're probably going to comment a little bit on each, but I wanted to invite you to maybe offer some additional color on the trends that you're seeing in each, whether from the enterprise demand side or even the education side and maybe some of the divergent KPIs that you're seeing there.

Yes. Most of the trends, the positive trends that we see post-COVID, most of them, we see in the enterprise, enterprise, enterprise and tech OEM which we call. We do see a nice trend continue demand in education, but it's definitely not the most accelerated area of the company. We also see a very nice uplift in media and telecom. By the way, media and telecom was very slow during COVID because people will not focus so much in acquiring the next TV solution. But now it's coming back, and we are signing seeing some very nice deal. So to make a long story short, most of the demand is around the enterprise. Most of the demands are around companies that are trying to find the post-COVID solution, which will be a very infrastructure-oriented solution and not just to solve 1 specific area.

And then on your guidance comment, you highlighted the guidance is very back-end loaded for this year. I think I'm sequencing correct, you were kind of like flattish to down and kind of flattish to up next quarter and then acceleration in the back half of the year. Can you remind us what's driving that trend, right? So the more pressure in the first half, and then what's giving you confidence that you are going to see acceleration in the back half of the year in revenue growth?

First of all, the demand is still there for the products and the booking is still nice and solid. But if you look on the guidance on the numbers that we delivered, first of all, the first quarter of the year was even a little bit decline quarter. Then the second quarter was basically a flattish quarter in terms of the guidance that we provided. And then the overall year guidance was 5% to 8%, which means that the second part is definitely should grow above this number and on a sequential growth should be much stronger in the second part of the year. What we see, which is important is, first of all, the main reason or the main 2 reasons for the flat -- this first part of the year, was, first of all, a very specific incident that we have in 1 specific customer that we announced. It is part of our first quarter announcement. A major customer that because of, I would say, political reasons not related to pricing, not related to the product, have reduced the level of business with us. And then, by the way, now it's picking up again. So it's not a churn of a customer, just a specific incident, but it did have some impact on the first part of the year. So the reason for the flattish situation in the first part of the year was not a complete slowdown in the business. It was a 1 specific situation and the fact that, as I mentioned, a longer cycle to close some major deals, which is not something that gets worse. And therefore, with the type of visibility that we have at this point in the year, 6 months into the year, we feel that we can deliver at least the numbers that we provided to the Street because, by the way, we did mention also that the gross churn rates have not changed significantly other than this specific situation with this specific customer. So all in all, there is pressure on booking. Like we mentioned, there was a specific customer situation. There is no gross churn trend that's going negative. And with the type of booking and type that we see right now, we feel that we will be able to deliver at least the growth rate that we guided for, which means that the second part of the year will be very nice in terms of the sequential growth, which we can highlight also the way that 2023 can start to develop. And as you know, in the SaaS company at this point of the year, you should have a very strong visibility into the second part of the year.

Yes. That's a benefit of the recurring revenue model, relatively low churn. We talked about the potential positive impact of CFOs thinking about cost reduction and your product being a way they can address that. The potential negative is customers coming back and asking to renegotiate unloading price, which they do every day with their vendors. Are you having those conversations with customers? They're coming to you and saying, look, we want to keep you with a vendor, but you have to help with that on price. Are you having those conversations yet?

First of all, the short answer is yes. People are asking, especially that we're starting to discuss recession, especially in education. I can tell you there was always a pressure on pricing. But at the same time, the benefit that we have as a company that's selling platform that at many places we can offer instead of reducing prices and get the impact on the margins, we can offer more features and more layers that exist in the platform. So without additional development, you can increase the sales and actually the revenue for the specific customer. And this is, by the way, one of the reason that the net dollar retention rate of the company was all the time, a very nice positive number, even though we don't have a major part of the business, which is a consumption base. Most of our traditional business was FTE-based. But at the same time that it was FTE-based, we managed to create a situation of net dollar retention rate that was all the time between 105% to 120%. The main reason was the lower gross churn rates and the fact that we are continuing to introduce to customers more layers and more solution in the same platform. So events was not exist 2 years ago. And now we are going to all our 1,000 customers and basically offering them another layer of the product, and this can create a very nice upsell momentum.

I just wanted to shift to competition, if I could, I think broadly engrossing the entire space, this growing fear the competition is going to shift more towards pricing and even bundling. And you even mentioned yourself that probably the way you're addressing customers asking for discounts is to add more product to the traditional competitive response. What is the competitive environment today? Who are you seeing most frequently when you go in for an RFP? And then how do you continue to differentiate relative to those peers that you see?

Yes. First of all, competition in Kaltura story, it's a different -- a little bit unique story because of the fact that it's a very wide platform, and there are not so many video companies that really selling platform. So you can find in our competition, in some cases, companies like Zoom, for example, not in many places, by the way, then you can find other traditional video management companies like even Brightcove and Microsoft playing in this area. And then from the other end, when we started to penetrate the virtual event market, which was just 2 years ago, at the beginning, it was Zoom, Vimeo and companies like this. But then suddenly, it became the traditional events companies that added video to their platform, like the Cvent, the RainFocus, Bizzabo of the world. So pricing is always an issue. You cannot hide from a pricing, especially in the recession time. But at the same time, when we can introduce a platform that is so flexible and it's a TV-grade platform, and it's a platform that can serve organization that now before it was just a large organization, but now it's a platform that can serve small solution, for example event of 5 people all the way to a 500,000 people events. This is a very unique situation, and this would allow us to still keep reasonably good pricing. But I cannot point on a specific competitor that compete us across the board. As I mentioned, it's a very broad. This is the advantage of Kaltura. Someone can say that this is the disadvantage or maybe it's the focused situation. But at the same time, we proved that in any territory that we played, we become a major player in terms of the technology, the solution, even if not all the time is the major revenue player in the industry. So the competition is there, but because of the robust platform, in many cases, when we want to win, we don't need really to reduce pricing significantly.

No, that's great. I want to shift a bit just to employee hiring, retention and compensation, discussion we're having a lot with investors on a, call it, Salesforce presentation this morning. But I think during that presentation, it was narrowed down quickly, the conversation has shifted from oh my gosh, we can't hire anybody to are you going to cut headcount, right? So I guess, first, what is the employee hiring, attrition situation for you guys?

Yes. This is a unique situation in Kaltura. First of all, most of the R&D staff in Israel, it's based in Israel. And the competition in Israel is rough. Many companies raise a lot of money, and there is a very limited number of engineers, quality engineers. So I can tell you that the most difficult area to Kaltura is definitely R&D. It's changed a little bit the last few months that people are not so quickly shifting jobs because of the slowdown in the tech and the recession discussion. It was difficult, but at the same time, I believe that in most of the cases, we have been managed to hire the right people because of the culture of the organization, because of the success. The only challenge that we had is obviously the price of the share. In many cases, people don't want to be attached to a non-success story, at least from the way that it looks to the public market. But at the same time, it's a huge opportunity. If you can explain to the people why the valuation right now is probably not attached to the results of the company, people can buy into it. And I believe that in 90% -- 80% to 90% of the cases, we've been able to hire the right people in terms of that. The other area that is a bit challenging is the sales mostly and sales to the enterprise. It's not a typical salespeople that's selling SaaS solutions. It's people that can sell, in our case, to build the organization to Fortune 500 and mostly in the U.S., most of our business in terms of enterprise is still coming from the U.S. So it was hard. We mentioned the last few calls that we are a little bit behind our plans in terms of hiring salespeople. I would say that we did 80% of what we needed to do in order to increase the size of the organization. Most of the people we brought. And at this point, it's -- to your question, it's a balanced discussion how much we want to continue to invest in order to have the right infrastructure to support this kind of growth level compared to the discussion that basically everybody are discussing right now what is the bottom line, the cash flow, et cetera. So we need to balance the thinking. At this point, we decided to continue to invest. But as I mentioned at the beginning of the session, we made the site soon to change a little bit our view and to slow hiring or to change the cost structure of the company, but yet to be seen. The decision has not been made yet.

It's a complex and difficult decision surely. And related to that is something else we're talking to investors a lot about were you saying that's stock-based compensation. And the mix of companies of cash versus stock-based comp. It goes back to my older comment about 12 months ago, where the view is very different and people probably welcome a lot of stock-based comp with a view of significant upside, and now potentially find themselves below water. So first, what is Kaltura doing about the stock-based comp previously awarded, are you really striking that? Is that being addressed for employee retention? And then if you can just remind me of those key employee areas like enterprise sales, like R&D, what is the average mix of cash versus stock-based comp?

Yes, I would say that in terms of salespeople, people are still looking for more like dollar compensation or salary compensation than stock. They want to sell to get commission to get it fast in most of the cases. It's still the case. Obviously, as you get more senior, you want to have more upside coming from equity. We did have a challenge. We did have some challenge, especially when the stock price went down and people started to see that they are getting below water or around the water level. Now it's obviously too many new hires. It's a huge opportunity because nobody really believe that right now the valuation of the company is the right valuation. So there is opportunity. In most of the cases, the stock-based compensation was an issue because of the decline of the price of the share and what is happening right there in the market. It was around R&D people, especially the senior R&D people, because they want to attach their development to the success and especially in a public company, it's to the price of the share. But I believe that with the culture that we have in the company, the retention rate or the attrition rate was very low. It was under pressure the last few months, 3 months, not just because of the price of the share is because of everything that happened around us in Israel, especially around technology, but we have been able, at least 80% of the people that we wanted to keep to maintaining the company from the people that wanted to leave. So to make a long story short, there was a pressure. We manage it well and now it's become an opportunity to everybody because everybody do believe that it should go to a different place, especially that we at least went down even before most of the other tech companies. And right now, it's even going the other direction.

And I apologize if I missed it in the answer, but you said that you addressed it. Does that mean that you did reset the stock-based comp or you have plans to reset that?

No, no. First of all, there are not many companies that did repricing or even considered to the repricing. I can tell you from discussion with lawyers and other companies, many companies right now are considering to do a repricing, but not many of them did it, by the way. There are not many situations of companies that did it, especially not in tech. But I would say that it's probably going to happen in the next few months that the company will start doing repricing. Obviously, we will not be the first or the first wave to do it, but we will consider to do it, especially that we do believe that the opportunity or the upside can be significant, especially where the price is right now. But at the same time, we did shift at least a little bit the mix between options to RSUs, so we did grant to employees to the key employees more RSUs as less options than we did before. So I think we are in a good shape right now. And by the way, the best outcome is that most of the people do believe that it's going to go significantly north for me, at least in our case.

Okay. And you had commented, I think that somebody, their employee attrition or consider employee attrition that have been addressed. So it sounds as if any potential pressure there you did address. But then your comment that you don't want to be the first to move, but you think you will it's -- notice probably other companies. Is the view there that you would like to see some larger kind of like tech companies move first for the air cover that, that provides? Or what's the purpose waiting for somebody else to go first?

No, no. It's just a semi-legal decision not a rule. And repricing is not something that the public likes to see so much companies doing. But in a situation like this, that most of the tech companies are going down by 50%, 60%, 80%, 90%, they're probably going to be a wave. It's going to be the normal probably at some point. It was not the normal. If you look in the last 5 years how many companies did repricing of options, you can count them in 1 hand because the public doesn't like it so much.

Well, I got mineral stock at 70%, so that didn't work so well.

Tell me about it. I'm building stuff for the last 25 years. So I've been there whole time.

Why don't I just give you a chance before we close here if there's anything else that we didn't address that you think people are missing about the Kaltura story that's being overlooked either at recent earnings or even operationally recently?

No. The only thing that I can tell that the Kaltura was never a company that was growing 50%, 60%. Even in COVID situation, we did accelerate to the high 30s, but it was not a onetime thing that then churn levels become so significant because COVID is behind us. By the end of the day, it's a more robust but a very balanced platform story that people can evaluate and decide if they want it for the long term and not just for the short term. And we do believe that post-COVID, during recession, before recession or post-recession, we can adjust ourselves because it's a platform story and offer the right solution for the right businesses because it's really not a one-trick pony. So it's maybe to some people, seems like a disadvantage because it's a little bit as a complex story. From the other end, it's a very solid story that can face any situation in the market. We are very excited about the story going forward.

Yes, that was a good overview, Yaron. I really appreciate it. Yes. Thank you again.

Thank you very much.