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spk08: Everyone and welcome to the Kaltura second 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'll now turn the call over to Erica Mannion at Sapphire Investors Relations. Please go ahead.
spk00: Thank you and good morning. With me today from Kaltura are Ron Yucatel, co-founder, chairman, and chief executive officer, and Yaron Gamarzi, chief financial officer. Ron will begin with a summary of the results for the second quarter ended June 30, 2023, and provide a business update. Yaron will then review in greater detail the financial results for the second quarter, 2023, followed by the company's outlook for the third 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 June 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 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.caltura.com. Now I'd like to turn the call over to Ron.
spk05: Thank you, Erica, and thanks to everyone for joining us on the call this morning. Today we reported total revenue for the second quarter of 2023 of $43.9 million, up 5% year-over-year, and subscription revenue of $40.7 million, up 7% year-over-year. Adjusted EBIT up for the quarter was negative $1 million. For the third 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 93% of total revenue compared to 90% in quarter two 2022. Given the results of the first half of the year, we are cautiously increasing our revenue guidance for the full year. We continue to focus on returning to profitable growth and achieve the lowest adjusted EBITDA loss of the last eight quarters. Given the results of the first half of the year, we're also cautiously increasing our adjusted EBITDA guidance for the full year. We are once again reaffirming our plans to achieve a positive adjusted EBITDA in 2024. Regarding cash flow, we materially reduced our cash consumption from operations in this quarter to $4.1 million compared with $22.5 million in quarter two 2022. This brings our total H-123 cash consumption from operations to $11.6 million compared to $42.1 million in H-122. We expect to post positive cash flow from operations in the second half of 2023 and following our typical seasonal greater cash losses in the first half of next year, arrive at cash flow from operations break even 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 getting there again very soon. independent of our top line growth. Moving on to the business update. We landed this quarter a new Fortune 50 bank customer that is consolidating their video content libraries into a single platform and supporting interactive video for learning and training within the organization. For a new global investment bank customer, we are powering all internal and external events and their internal video portal. Two Silicon Valley trailblazers, have chosen Kaltura for the first time this quarter to power events and internal communications. We were also selected by a leading global healthcare organization to provide live streaming and webinars for all their events, by a newly signed European government institution to power their worldwide events, and by an online learning company that is starting to use Kaltura to consolidate several video experiences previously powered by multiple video platforms. While the industry headwinds that we have been reporting on persist, and we are observing these translating into lower budgets, increased price pressure, and elongated sell cycles, we are glad to see our leading demand indicators continue to grow. We posted this quarter a sequential increase in the number of new qualified leads, in the number of meetings set by our SDRs, and in the number and size of our RFP submissions. The growth in all these parameters was also fueled by increased demand for our newer event platform and virtual classroom products. We believe that these top-of-the-funnel demand indicators, as well as our growing sales pipeline, signal that we are positioned well competitively, that our newer products are well embraced, and that the market interest in KOTORA is growing. This was also echoed this quarter with us winning industry awards, such as the Overall eLearning Solution of the Year category at the 2023 EdTech Breakthrough Awards, and five awards at Global EventX 2023, including in the Best Event Technology, Best Virtual Event Platform, and Webinar Software categories. This quarter, we hosted Cultura Connect on the Road 2023, series of five exclusive events across New York, San Francisco, Atlanta, London, and Berlin. These were the first KOTORA organized physical industry events held since 2020. We were thrilled to have a speaker lineup of 24 top industry executives from global leading companies, including KOTORA customers such as AWS, SAP, Salesforce, VMware, and IBM. Hundreds of SMDs had the opportunity to network with industry leaders and visionaries and participate in hands-on workshops and interactive roundtables discussing the use of video experiences for marketing and learning and development. The event focused on helping organizations achieve better ROI and meet their ESG goals through video-based digital engagement, particularly in the context of widespread marketing budget cuts and reduction of in-person training sessions. Speakers and attendees exchange insights about hybrid events, the role of artificial intelligence and video experiences, how online video experiences further diversity, equity, and inclusion, and the need to converge around a single video platform across multiple products and use cases. All these aspects were also identified by speakers and attendees as areas where KOTURA brings great differentiated value, helping them to achieve their business goals. Lastly, on the product development front, This quarter, we continued beefing up our events platform, enhancing event templatization and theme editing, registration management, user authentication, session moderation, and content distribution. We enhanced our video portal with a dashboard for content creators to track better engagement with their content and added better support for multi-language content. We also upgraded our video conferencing rooms to include production studio features such as room branding and lower thirds, storyboard capabilities that enable preparation of session segments and content in advance, a mirror integration for collaborative whiteboarding, and enhanced customization and branding capabilities. We also launched cloud regions for our global SaaS service to address regional requirements for data privacy and security and localized support. This also lays the groundwork for us to be able to launch additional specialized cloud services for highly regulated markets such as federal, healthcare, and financial services. We would also like to share our move into the world of generative AI, where we are already starting to collaborate with customers to boost our video-based experiences for marketing, communication, learning, and training, and entertainment, and increase their return on investment. The new capabilities are intended to leverage Cultura's extensive content libraries and in-depth analytics to add enterprise-grade generative AI that will drive efficiency and reduce content production costs for our customers across learning, knowledge creation, marketing, and entertainment use cases. Kaltura's in-depth analytics enable optimization of the models as well as feedback loops for continuous learning. We plan to insert generative AI capabilities into a broad range of our products and cater to enhance content creation, search and discovery, interactivity, and analytics reporting. This includes, for example, using AI to create new assets from existing content, like repurposing event or webinar content into many highlight reels for highly targeted distribution across social platforms, and for enriching our immersive and intelligent content search and discovery services with new interactive capabilities, and for making content more widely accessible to help customers comply with regulatory requirements. Building on our new generative AI capabilities We also plan to launch a system event creation capabilities for event hosts that include auto generation of content and improved insights intended to streamline event creation, grow attendance, boost content discovery, and reach end user experience and increase engagement. As an open and flexible company and platform, we continue to harness innovation from across the tech ecosystem. Kaltura's partner program already includes generative AI providers, that have integrated their solutions into our video experience cloud and are available to Kaltura customers. As part of our partner programs, we intend to launch a Kaltura AI accelerator program that will connect AI startups with Kaltura products while facilitating brainstorming, knowledge sharing, and value creation with Kaltura enterprise customers. We are excited about the great promise that generative AI holds to create hyper-personalized, hyper-engaging experiences on the fly. We believe that this will significantly increase the creation, consumption, and ROI from video experiences, and that KOTORA and its customers would stand to benefit from it tremendously. In summary, we continue to make progress towards our goal to return to profitable growth. We posted, again, record subscription revenue, continue to increase our year-over-year total revenue growth rate, and further reduce or adjust even the losses and cash consumed from operations. Despite the continued industry headwinds, we continue to be encouraged by leading demand indicators and are excited about the adoption of our newer products and about our continued innovation, especially around generative AI that has the potential to significantly grow the demand, usage, and value of our solutions. We are cautiously increasing both our revenue and adjusted EBITDA guidance numbers for 2023 and they're reaffirming our plans to achieve a positive adjusted EBITDA in 2024. We plan to post positive cash flow from operations in the second half of 2023 and to achieve cash flow from operations break even 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.
spk04: Thank you, Ron, and good morning, everyone. As I review our second quarter results today, please note that I will be referring to a non-GAAP metric adjusted EBITDA. A reconciliation of GAAP to non-GAAP financials is included in today's earnings release, which is available on our website at www.investors.cultura.com. Total revenue for the second quarter ended June 30, 2023, was $43.9 million, up 5% year-over-year. Subscription revenue was 40.7 million, up 7% year-over-year, while professional services revenue contributed 3.2 million, down 21% year-over-year. The remaining performance obligations were 174.3 million, up 1% year-over-year, of which we expect to recognize 59% as revenue over the next 12 months. After the close of the quarter, we had a customer reduce their three-year commitment by approximately $7 million, spread equally over the years. We posted in the second quarter a record analyzed recurring revenue of $163.4 million, up 8% year-over-year. Our net dollar retention rate was 100%, the same as Q2 2022. Within our E&T segment, total revenue for the second quarter was $31.2 million, up 2% year-over-year. Subscription revenue was $30.3 million, up 7% year-over-year, while professional services revenue contributed $.9 million, down 58% year-over-year. Within our M&T segment, total revenue for the second quarter was $12.7 million, representing a 10% year-over-year growth. Subscription revenue was $10.5 million, up 8% year-over-year, while professional services revenue contributed $2.3 million, up 20% year-over-year. GAAP gross profits in the quarter was $28.6 million, representing a gross margin of 65%, the highest gross margin since Q1 2018. Within our EMT segment, gross profit for the second quarter was $23.1 million, representing a gross margin of 74%, up from 68% gross margin in Q2 2022. Within our M&T segment, gross profit for the second quarter was $5.5 million, representing a gross margin of 43%, down from 52% gross margin in Q2 2022. Gap net loss in the quarter was $10.8 million, or 0.08 per diluted share. Adjusted EBITDA for the quarter was a negative of $1 million, improving from a negative of $8.5 million in Q2 2022. Turning to the balance sheet and cash flow, we ended the quarter with $70.6 million in cash and marketable securities. Net cash using operation activities was $4.1 million in the quarter, compared to $22.5 million in Q2 2022. I would now like to turn to our outlook for the first quarter of 2023 and for the fiscal year ending December 31st, 2023. In the first quarter, we expect subscription revenue to grow by 5% to 7% to between $39.8 million and $40.6 million, and the total revenue to increase by 4% to 6% to between 42.7 million and 43.5 million. We expect a negative adjusted EBITDA between 0.5 million and 1 million. For the full year, we expect subscription revenue to grow by 5% to 6% to between 159.6 million and 161.7 million, and the total revenue to increase by 1% to 2% to between 170 million and 173 million. We expect a negative adjusted EBITDA between 4.5 and 5.5 million. In summary, despite the macro environment and our industry headwinds giving the positive results of the first quarters and our leading demand indicator, we are cautiously increasing our revenue and adjusted EBITDA guidance for the rest of the year and expecting to generate a positive cash flow from operations in the second half of 2023. We are encouraged by our continued progress towards a profitable growth and are reaffirming our commitment to positive adjusted EBITDA in 2024 and to achieving a cash flow from operations breakeven by the second half of 2024 with a sufficient cash reserves in dependence of top line growth. With that, we will open the call for questions. Operator?
spk08: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone tone. If you're using speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we'll pause momentarily to Our first question comes from G.J. Hines with Canaccord. Please go ahead.
spk11: Hey, good morning, guys. Ron, I wanted to ask about what you're seeing in terms of retention dynamics in the core E&T segment. Look, I would have expected to see a bit more sequential growth there coming off of last quarter. You know, year-over-year growth ticked back down to 2% against an easier comp. You mentioned this three-year customer that is reducing its commitment by $7 million over the term of their contract. Maybe just unpack that. growth retention dynamics as we think about how the model plays out over the next couple of years?
spk05: Hey, DJ, thanks for the question. I'm happy to do so. So first, from an NDR perspective, you've seen that it was 100% slight decrease to 102 last quarter, 100% in quarter last year, and aligned with our general expectation for the year. We expect that to be gross motor around that same number, but things are going to tick up again. From a growth retention perspective, So the gross retention levels were somewhat lower compared to the recent quarters in this quarter. We had approximately two-thirds of the first half reduction, both Q1 and Q2, from partial reductions. So that means that customers are still with us. And only one-third came from kind of full-churn or non-renewal. So we're no longer working with the customers. So it's more kind of an uptick on partial reduction because of price pressures or certainly projects that people are doing less of. Even in the case of what we've mentioned on the RPO side of next quarter, this is a reduction. It's not a complete departure of a customer, and that's a separate one that we've announced on. The majority of the churn is due to kind of no longer requiring the product, but it could sometimes be virtual events that turn physical, and so they're kind of stopping at this point in time. And then the second reason would be certain price pressure only five percent of the reduction is due to i'd say product feature gap or service level issues from a segment perspective question on the mmt front there was an improvement from last quarter actually better retention still lower than usual on the ent side it was a bit lower than quarter one it's lower than usual but one thing to note is that we had a quarter with even lower E&T retention, so we have this quarter in each one of the last two years. In fact, quarter 2023, the exact same quarter of the year before, was lower in E&T. So it goes up and down from time to time. We do expect next quarter to still be lower than usual, and that's fueled in part by that customer that we had mentioned. But then in Q4, we expect, given current forecast, things to come back to usual levels. And all in all, just to frame things in an overall kind of size, we forecast for this year to be a few percent lower than the usual retention rate. So nothing much more drastic than that. We're not seeing a crazy reduction. But it will be a few percent lower than the typical gross retention rate. And we think it's more than anything else a sign of the time, like we said, squeezing and stopping certain projects and then coming back. Does that address your question?
spk11: Yeah, it sure does. I want to follow up. maybe on the pipeline generation metrics. I mean, you sound pretty excited around qualified leads, RFPs, the meeting set, all that sort of stuff. How are things progressing through the pipeline? Like what are you seeing in terms of timelines to get deals over the finish line?
spk05: That's a good question. So because we did indicate that we are seeing a meeting set by SDR tick up and we are seeing out of a year of a year sequential growth in that. And, and it was declining significantly. mid-last year, and we are seeing from an RFP submission, continued year-over-year and sequential increase, and also that was supposed to decline in the second half of last year. And also to the extent that, you know, the specific products that are looked at on RFP, there's a lot more requests for newer products, event platform, virtual classroom, and that's also to continue to pull up the average opportunity side in our RFP. So just to give you an example, the event platform responses, were more than double compared to Q1 and Q4 last year. So Q2 was like the sum of Q1 and Q4 and a bit more. So it's pulling up. So that's on the top side of the funnel that QBM meetings, RFPs are pulling up. At the bottom side from a win rate, we continue to do well. In fact, it was a record. It was even better in the last X quarters, and it's a really strong number. Um, so that's not the issue, but the bigger issue that pertains to kind of the general headwinds of the industry of lower budgets, increased price pressure and longer to tell cycles is that they are getting prolonged. So they are taking longer to go through the funnel. It's not that we're losing the deals and it's not that new opportunities are not opening up, but they're taking longer to go through the process. Um, and so for Q3, now we have a pretty rich pipeline and let's, if it closes in Q3, it goes out to four delays continue. But that's the biggest story around booking, not the top and not the bottom, but the middle.
spk11: Yep, got it. Makes sense. Okay, thank you for the call. Thank you.
spk08: Our next question comes from George Iwanik with Oppenheimer. Please go ahead.
spk02: Thank you for taking my question. Ron, maybe following up on the environmental answer that you just provided. Can you give us a little bit more color on the pricing question you mentioned and the competitive dynamics? Are you seeing vendors be more aggressive to take share or is this more IT spend driven that your customers are just looking to be more cost efficient?
spk05: It starts with the latter. The customers need to have less money, to spend less money. And it does also affect competitors' willingness to reduce prices, both for new bids as well as existing customers, even more so existing. The biggest story on Cotura has been that over the years, we've received again and again the statement that people want to switch to us. And we still have quite a lot of switches. And that's both because the product is better, stronger. but also because we could uniformly address multiple use cases across external, internal, on-demand, live. And we also see a lot of that, a lot of consolidation. And so the question is when they do that. In a typical year, they jump on and say, look, we already want to do this. It saves us money. It's more efficient. It's great. In a year like this, if an existing vendor says, you know what, I'll reduce our cost by 10%, you know, just stick with us, then they might say, you know what, can we push that by year? We'll just continue with the existing vendor. So we get more statements on bids that had interest to replace to us that they want to delay this a bit until it's a year to make such a switch. And so I'd say it's a combination of both of these aspects. And like I said, from a retention perspective, the majority of the retention behavior are people that are reducing And a portion of that reduction is pertaining to price. It's not just a change in need, like a virtual event moving physical, but people saying, you know what, let's just go to a more affordable option right now.
spk02: Then following up on the customer engagement with the platform, I know over the last year you've been gradually adding more low touch opportunities for customers to directly engage with the platform. Can you give us an update on what you're seeing there?
spk05: Yeah, happy to do that. So as I said, the low touch is divided into two parts. There's the enterprise offerings that are not complete self-serve credit cards, but you could have that and have less services. And an example of that would be our event platform or EP product, which was a reincarnation of our original VE virtual event solution that was rich with services that were required by Kultura. That automated things, so you could do it yourself through templatization. And then the second piece is complete self-serve, which is credit cards. And that also lends itself more to departmental sales and even more so SMB and SME. So let me start with the first one, which is lower touch. Yes, indeed, a lot of what's happening is increased sales that are using products that are more low in touch. That's what I said earlier. Also, the demand that's growing for our EP product, that's picking up. And you can see that the ratio of professional services over revenues continue to go down, and there's continued to be nominal decrease in our professional services on a year-over-year basis. We expect that to be this year, et cetera. From a complete self-serve, we're making good progress on optimizing the products. We have more pickup of users. But I said earlier that this is not one of these things that's going to make a big change to this year's revenue. And I'm not trying to over-promote it until such time as we can tell you, look, this is now really moving the needle for us as a company in our bookings and growth. Are we making progress in deploying it? Yes. But I wouldn't, again, I wouldn't start talking about the revenue impact of this over the next few quarters until next year it should be an impact.
spk02: Great. And last question for me on the generative AI functionality that you're putting into the platform. Can you give us some perspective on timing? Is this something that you look at as primarily driving customer stickiness and potentially expansion? Or do you see some price changes also or new products that could fall out of the equity?
spk05: Yep. So we started to collaborate already with customers to boost our experiences with AI. Broadly, the AI plans are divided into, I'd say, three buckets. There's the video analysis and metadata enrichment. So it's not creating video, but it is around video. And that's where our rich media asset is enhanced with AI. So, for example, if you're adding better ASR, which is transcription using, for example, Whisper open source project, or are we doing better OCR and understanding what's inside the video? Are we doing speaker identification, what's called also diarization, that you can actually understand who's talking when in the video, or titling, or chaptering, or keyword identification, or summarization of the text, or pose creation. So all these is expected to happen over The next few months, there's already pilots out there running with customers, and we're excited about that. The next step after is content creation, when it's the actual video creation and editing. And here, too, I divided it into two parts. There's the part where there's existing video, and all you're doing is repurposing. It's more like clips or highlight reels, and that's going to come in sooner. And then there's the more robust full generation of video. So you insert text, you insert audio and images, and you get a video in an automatic way. That's not in the immediate short future plans, but we do expect to get there. I'd say by and large, the big opportunity that AI introduces is compressing two things that used to have been separate, which is production and distribution. And the ability to have that on the fly and highly personalized so that each person gets the video and the right content, the right context and the right time to maximize the actual engagement is really, really interesting. And then on top of creation of video, there's image generation, social posts, like thumbnails that are creating on the fly. And then the third category, I said there's three. There's the video analysis, there's content creation. The third is just general AI-powered features that are not related to video but are touching the experience. So, for example, assistance for the events or wizard for automatic generation of events and webinars. So you basically insert what you want to do and it creates you in the webinars. That third piece is also advancing in parallel to the first one. So it's less video centric, but it is experience centric. So it's all going to happen in the next few months, but pieces of it are going to take longer. It's a multi-year strategy. As I said earlier in my script, we are also banking on partners and we are historically known to do that really well. And we expect to do that. And yeah, we're excited about AI, but it's, You know, we're in an interesting place because we have the content, we have the experience, and we have a lot of data, and we own the data horizontally in the enterprise for users for a lot of different use cases. So if we add AI on top of that, that's going to be quite powerful.
spk03: Thank you.
spk05: Thank you, George.
spk08: Our next question comes from Ryan Koontz with Needham & Co. Please, go ahead.
spk06: Hi, Maureen. Ron, it sounds like you're relatively pleased with the sales execution here, and I wonder if you could reflect on what you can share in terms of color on organizational strategy, process changes you've made to improve your predictability and productivity. I mean, despite obviously some of the headcount cuts, you guys have turned it around here. So what can you reflect that you've made some changes to in the organization that you think is having results? Thanks. I appreciate that.
spk05: Again, I'll put the parentheses. I'm very happy with what we're doing in the market. I think we're doing better than the other folks. There are headwinds that are impacting the slower execution and bookings, and this is not a typical year. We expect to do much better than that. I am pleased that we're out there reaching out and, beyond anything else, have made very well the expansion from the internal use case into both internal and external together with our marketing CMO fronting products. And that's enabling us to grow our ARPU, but also double down on our unique offering to be that horizontal platform to consolidate all different video use cases in the enterprise. So that's very powerful. And I'm also happy that our win rates are holding and actually doing even better. So that's good. Now, insofar as what are the changes that we've done in order to accommodate for that? So first, No big revolution that's done over this quarter. For example, you know, we've gone through planning and execution on a multi-quarter basis. But I can tell you the general trends are to, A, further train and enable our staff to grow from the internal to external and to do CMO and serial sales together. B, enable our team to work better in lower-touch product environments and more product-led growth where people can start playing with the product and then getting the sale done, even if it's an enterprise sale, not complete self-serve sale, and how to support that from product marketing through sales, but also earlier than that from product and marketing, and the whole organization is aligned to do so well. And I'd say that by doing so, we've also gotten other competitors that we've done less work against in recent years, and I think we're doing better in being able to tell the story and why KOTURA and how we're
spk06: we're better situated we're getting a lot of folks that are interested in making these switches and i think you're going to see a lot more of that in the quarters to come so these are some of the improvements that we've made that's great thanks and what if you could you know comment at a high level kind of what you see strategically happening in the industry uh you know we saw kind of you know the bright cove yahoo announcement i don't know if you saw this morning but uh Hopin was just acquired by RingCentral, which is a little bit of a stretch for them. I don't think they know much about events and such. But what are your thoughts on the industry, consolidation, collaboration? Are there strategic channel relationships we've discussed in the past you think can come to bear for Kaltura? Any thoughts on the industry? I appreciate it. Thanks.
spk05: Yep, great question. Starting with Breikov and Yau, that's not a channel nor a strategic kind of statement. It's a customer. It's a bigger customer for them, which is great. But it's not a strategic shift. They've focused on media companies and the classic kind of OVP online video platform. As you know, the media and telecom, we've put a bit more focus on the TV rate delivery, which are more mission critical and could yield greater stickiness and less commoditization, better gross margins ultimately. So This is a bit of a different direction. We are coming down market to also larger media companies, but YOW is in the bullseye of the focus that Parco had always been in. And so far as the acquisition of Hopin, congrats. It just spells that there'll be continued consolidation in the space. Hopin are a product that's geared and fitted to the low-end market. or smaller companies, not the large enterprises. It's kind of the classic self-serve low touch all the way to SMB, SME, and not large enterprise. And so it will be interesting to see what they make of it. We don't compete with them much in the market where we are today. And even in the places we did go for complete self-serve, it was more towards webinar and less towards the event size. And the event size, we're doing work with the bigger folks. But it is yet another example of more consolidation that will continue to happen. Do we believe in consolidation? The answer is yes. And I'm sure we're going to take place in consolidation in whatever form. The good thing about Cultura is that we are very horizontal. We're in multiple markets. We're with multiple products. And we are an open architecture that enables to scale and grow and add to a lot of different components. So we could be a very strong consolidator in the market. And so far as your comment about channels, Yes, channel is really important. Historically, we've had 5% to 10% booking from channels, and it's remained consistent this quarter as well. And I said a few quarters ago that I expect that as part of our expansion into real-time conferencing-powered products and move into SME, we'll be able to provide more channel sales, and that's still the case. We're working on a few deals right now that will be quite interesting. Hopefully, we'll be able to announce. And they are channels that will go to market together with us and our products. So, yeah, the future will be more channels and more consolidation.
spk06: That's great, Ron. Thanks for a really thorough response. Appreciate that.
spk05: Thank you, Ryan. Appreciate it.
spk08: Our next question comes from Michael Turin with Wells Fargo. Please go ahead.
spk01: Hi, you got Michael Berg on from Michael Turin. Congrats on the quarter. I just got a follow-up question around the customer who downgraded by $7 million in the quarter. Anything to point to across the rest of your large key customers? How is the positioning, whether it's expansion, dowry, anything to point to in color in relation to that $7 million customary reference in the script? Thank you.
spk04: Yeah. First of all, as you saw, we mentioned this customer reduction around the RPO numbers. You saw that the RPO numbers jumped nicely in this quarter on a sequential basis. And the main reason for this is the fact that it was a very good season of renewal for us. And the reason that I mentioned this customer is not because it's such a material customer for the quarterly or even for the annual revenue of the company, just because of the fact that it's $7 million, approximately $7 million impact on the future RPO. So we will report, for example, next quarter. On an annual base, as we mentioned, it's basically roughly a third of it going to impact us on the next 12 months. This customer is still a major customer. It's important customers. Actually, we are discussing with them some other deals, and they are still paying us a big chunk of money. So the bottom line is that there will be a short-term impact on the on the rpo we don't believe that the rpo will go below the levels that we saw earlier this year but at the same time we do not anticipate it to continue to grow significantly in the coming quarter yeah and in the case of this specific customer it's a reshift in their strategic direction that caused them to to do something a bit different as i said earlier about different reasons for churn
spk05: It's not related to our products, not related to competitors. It's not related to service level. It's related to a decision that they've made to do something a bit different.
spk04: And in the next 12 months, the impact is immaterial to the business.
spk03: Thank you.
spk08: Our next question comes from Gabriela Borges with Goldman Sachs. Please go ahead.
spk09: Good morning, this is Jake Teitelman on for Gabriela. Ron, you've talked about customers consolidating all of their video content on Kaltura. It would be great to get a little bit more detail on how that typically increases your deal sizes and maybe try and quantify what the upsell and cross-sell opportunity looks like within the installed base.
spk05: Yeah, happy to do that. So there's a nice, large Silicon Valley company that's been speaking at our conferences recently that's been sharing their story of 12 different instances and six different vendors that they've consolidated into Cotura, including names that you all know. And their view is that, you know, they have broken workflows otherwise and it's a lot more costly. And this, you can also get unified analytics across the enterprise and much better ROI if you move to one platform. And so they started replacing many of them. And it's a repeated theme for us And so what the motion is usually from an upsell and cross-sell, it varies. I mean, historically, we've entered through the internal use case and more VOD, call it the video portal or video content management layer, working with the CIO or with the HR or L&D department, learning and development. And then the expansion would be there are more and more instances across different groups or would be moving out to also include the marketing groups through events or external use cases with similar products. So when you think about the video portal, it could serve internally, but it could also serve externally. And so what we increasingly see is that the CIO is tasked with owning all video workflows on behalf of the CMO and others. Of course, they're involved in the purchasing decision, but they're trying to get to a point where there's one platform that caters to all that. Now, forever there'll be a standalone separate platform conferencing system for the productivity and collaboration stack. And these would be kind of the usual suspects. But everything except that is consolidating to be provided by a single vendor. And you'd note that most other, if not all other vendors, have not even taken the approach of consolidation. And this isn't something we started talking about this or last year. This goes back to our origin that we've stated we believe there's a need for one Lego kit that goes across the enterprise that is tightly integrated So it could power workflows, but also horizontal and interoperable. And so far as how that's affecting ARPU, well, look at the company. I mean, we've consistently grown and grown and grown our ARPU. We don't report on that on a quarterly basis. We talk more about it on an annualized basis, just state that it's growing. But it's the new deals that are going up and the average MR per customer is pulling up and we're just getting bigger and bigger deals. Obviously, that works to the other direction that in parallel, we're also getting into more SMEs and ultimately will self-serve smaller customers, but that's my choice. But if you think about the size of deals of large customers, this is very big. So if you take a bank, and we are in six of the leading banks in the US as a vendor, they may have started with training and then have moved into webcasting and then have moved into events and are now using us also for mission-critical empowerment of their wealth managers to offer video for wealth management. And they've grown from accounts that were worth a few hundred thousand into accounts that are in the multimillion. So it's anywhere between a 5X. We ultimately believe it could be a 10X growth in these accounts, and that's going to pull up our NDR. So we're seeing the beginning of it because this year is a tough year, and the last couple of years coming out of COVID and then getting into this financial situation is causing a lot of these companies to say, we're going to do it more gradually. We're going to wait it off. We want to do this. But the moment it hits, it's going to pull us back up, we believe, into not only the historical NDR rates, but even higher rates. The last thing I'd say is that a lot of these things, because they're moving into the world of content creation, not just content management, could lend themselves to be more usage-based and therefore could even have even higher NDR and could be the gift that keeps them giving. And we believe that the models could change from more FTE-based into more usage-based as we continue to progress. But let's take it one quarter at a time and see how this hits.
spk09: Yeah, that makes sense. And then I guess just to follow up on that, what needs to happen to get Kaltura back to 10% growth? And how much of that is in your control versus, you know, depending on the overall spending environment needing to improve?
spk05: That's a good question. So let's start from the other side of it, by the way. Nothing needs to happen for us to be profitable. We're on the way to do that. We've always promised that. We're executing on that cash flow profitability. That's done. Insofar as growing, as you can see, we're doing better than the other companies out there that are guiding down, that are reducing revenue. We are not. Not to say that we're celebrating because this is a far cry from what should happen, but it's a very, very tough couple of years for the industry. I think that what keeps us more optimistic is the fact that we're seeing, A, the type of companies, the logos are great, big leaders, top blue chip customers that are signing with us, including top tech companies that are choosing nothing but the best. And that we've landed, we've stuck the landing around expansion into the new markets that we are entering. Now, as we've done historically, because we've entered for the first time many markets and have done so well. And so I think that what needs to happen, other than continue to optimize and finesse what we're up to, is for the markets to start turning around, for budgets to start being more available, for the squeeze to start coming down. Now, is it to say that until markets don't flourish, we're not going to get to north of 10%? No, that's not the case. We do believe that the second half of the year, given all the deals that have come into our pipeline, albeit taking more time, will come to fruition. We do expect that we will continue to grow and accelerate, and we expect that after a certain period, we will reach that milestone. But it's hard to say, honestly, in our industry, how quickly that will take place. We're very, very confident that ultimately we're going to do that much better than that. because we've always been on the top of the heap of companies in our industry, and we're going to come back to that.
spk03: Thank you.
spk05: Thank you, Jake.
spk08: Our next question comes from Mike Funk with Bank of America. Please, go ahead.
spk07: Yeah, thank you for the questions. A couple if I could. I think earlier you mentioned the expect churn to remain elevated for the remainder of the year. Just a curious extension of that. Does that imply you expect it to improve next year? And I guess if so, why? Or was that comment just more about your forecast period for the calendar 23 year?
spk05: Yeah, one correction. I'll let Jeroen to answer this. He's jumping to answer. But before, just one comment. I mentioned that we expected to still not be amazing next quarter, but that in Q4, it will already improve, not next year. Go ahead, Jeroen.
spk04: Yeah, so... as Ron mentioned, the most important point that we do see turning around in Q4 and not even waiting for Q1 next year. And one of the reasons that we are still pointing to the fact that maybe next quarter it's still going to be down is mainly because of the fact that we mentioned this specific customer that actually the actual reduction happened in July and not in Q2. So it will impact the retention number in Q2. Without it, it will be different. The other point that I will mention regarding it, that we are still projecting that the net dollar retention rate is going to be in the same level for next quarter. So despite the fact that we see a lower retention, we do see a very balanced situation in the net dollar retention rate. And as mentioned, the situation around the retention is going to turn around based on what we see right now in Q4 this year.
spk07: Okay. Thank you for the clarification on that.
spk05: Yeah, I just want to say that we have decent visibility because these are large enterprises. It's not SMBs or SMEs, and it's not something that's kind of flooding all our different customers. It's specific cases, which we – We see and we know. So that's where we're at. Yeah, go ahead. You had another question.
spk07: Sure. One more quick one. You also mentioned pricing pressure earlier. I mean, it seems that the industry has been relatively competitive for some time, and obviously competitors are willing to discount from the bundle or discount to win deals. Can you just give us some more detail on the intensity of the pricing pressure? Has it increased recently? Are there signs there might be some maybe improvement in pricing, and any kind of comment around pricing and the dynamics there would be helpful.
spk05: Yeah, I think by and large, it's to the tune of 10%, 15% type of price pressure. When you're looking at renewals, it's not 20%, 30%, 40%. I think it's just more companies, more contracts have come to renewal as the more time has passed in this situation. And so there are some quarters that are more affected than others. I can tell you that tactically, We're seeing in quarter X or quarter Y a big, big difference. But I can tell you that it's still there. And we do expect that to gradually ease. Like I said, the bigger issue or the interesting part is that people do want to make the switch. And so it's just a question of when they're not going to care that much about X in their budget, that they're going to say, you know what, this is more efficient. For the mid to long term, this is a better solution. We're now raising our eyes beyond the immediate term and are doing what's right for our company for the midterm. And when that happens, then they choose Cotura. When all they look at is myopically at 2023, then they choose otherwise. And they're honest about that. And so I cannot tell you do they change their perspective in this or that quarter. I can tell you that it will change. It has changed. Every time in the past that cycles like this have occurred, And when it does, we're going to be even more in a better position. And, again, I've got to take you back and again to the point that we are executing better than the other folks out there. And you can see the growth rates and the impact that both retention as well as booking limitations have on them. We're still doing well.
spk07: That's all very helpful. Thank you for the question from the caller.
spk05: Thank you, Mike. Thank you.
spk08: ladies and gentlemen as a reminder if you would like to ask a question please press start and one our next question comes from austin cole with jmp securities please go ahead hey there thanks for taking my question hey so i'm just wondering about uh the plan looks like there's still the 33 million in debt that's current on the balance sheet if you could comment on that thanks yeah the
spk04: This debt is mature early next year, but we are in the final stage of negotiation on refinance of the whole thing. So the net impact on our cash level is going to be, it's basically going to be zero, and we believe that this quarter we'll be able to refinance it. We have a few proposals on the table, and the proposals, by the way, are better than what we have right now. So... no impact on our cash, and it's going to be renewed, and maybe even we'll have some positive impact on our cash level.
spk10: Great, thanks. And if I could just throw in a quick follow-up for Ron, you know, just to follow up on the Gen AI topic, you guys mentioned some of the new features, sounds pretty intriguing. You know, can you comment, is there any new talent you guys are bringing aboard there, any testing you guys are doing, and then then how can we think about any incremental revenue in the out years? Thanks.
spk05: Yeah, so we are absolutely bringing in talent and looking at different options. We've always been a build-by-partner, and we are looking at more partnerships in this space. And there's a lot of great stuff, and hopefully we can update you in the near future. Insofar as incremental revenue, too early to say that. I mean, for sure it's going to impact and it's going to do well. I think demand and usage of the platform are going to go up. But at this point, it's not changing. I mean, coming back to showing that we have increased guidance for the year. We are, you know, we've done okay for quarter two versus expectations. We beat them. And also for quarter three, we're coming ahead of street. And for the year, we've increased all numbers cautiously. And we're doing that bearing in mind that there's still the headwinds and we're taking them into consideration. So yeah, we're not inserting AI into these assumptions. This is all upside and we believe that the upside will come.
spk10: Great, thank you.
spk08: That concludes our question and answer session. I would like to turn the call back over to Ron Yucatil, Chief Executive Officer, for any closing remarks.
spk05: Yeah, I'd like to thank you all for your great questions and continued support. As I mentioned, I think it was a good quarter and a lot of good signs into the future in the parentheses of the market that we're all in. But we're excited about the top of the final trends that we're seeing, as well as with additional developments, including AI and other stuff. and are excited to see how this year continues to unfold. Have a wonderful day. Stay safe. Be well.
spk08: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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