Kaltura Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

There are 11 speakers on the call.

Operator

Morning, everyone, and welcome to the Coutura Third Quarter 2023 Earnings Call. All material contained in the webcast is the sole property and corporate of Cultura, which is all rates reserved. For opening remarks and introductions, I'll now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

Speaker 1

Thank you and good morning. With me today from Kaltura are Ron Yucateel, Co Founder, Chairman and Chief Executive Officer and Yaron Gomazzi, Chief Financial Officer. Ron will begin with a summary of the results for the Q3 ended September 30, 2023 and provide a business update. Yaron will review in greater detail the financial results for the Q3 2023 followed by the company's outlook for the Q4 and full year of 2023. We will then open the call for questions.

Speaker 1

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 ks 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 obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Please note, we will be discussing a non GAAP financial measure, adjusted EBITDA, during this call.

Speaker 1

For a reconciliation of this non GAAP financial measure to the most directly Comparable GAAP metric, please refer to our earnings press release, which is available on our website at www.investors. Kaltura.com. Now, I would like to turn the call over to Ron.

Speaker 2

Thank you, Erica, and thanks to everyone for joining us on the call this morning. Today, we reported total revenue for the Q3 of 2023 of $43,500,000 up 6% year over year and subscription revenue of $40,800,000 up 8% year over year. Adjusted EBITDA for the quarter was $300,000 For the Q4 in a row, we posted record subscription revenue and our year over year total revenue growth rate was the highest since the Q1 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.

Speaker 2

In the Q3, we also posted $1,700,000 in cash flow from operations, the highest since the Q4 of 2020. Stabilizing our bottom line and cash burn has been our main goal for the year. We repeatedly stated that we have reported both positive adjusted EBITDA and from operations in 2019 2020 and that we had a plan to achieve it again. We are pleased to have achieved it again in the Q3 ahead of plan. Moving on to the business update.

Speaker 2

In the Q3, we secured a 7 digit deal with a new leading financial services customer Who has chosen Cultura as their go to platform for all their virtual and hybrid events. We also expanded our collaboration with 2 of the largest banks in the United States, including signing a 7 digit upsell deal with 1 of those banks. Over the quarter, we continued to see growing demand for consolidation around Cultura across a wide array of on demand live and real time video use cases for both employees, customers and prospects. Continue to drive larger deals with new customers and expansions with existing ones. For example, a leading Fortune 500 A customer that started working with Cultura less than a year ago to power external events and marketing use cases expanded this quarter with another 7 digit deal to also utilize Cultura as their internal video portal for improved employee collaboration, knowledge sharing and training.

Speaker 2

And a European university customer expanded this quarter beyond our video content management suite connected to their LMS to also utilize our real time conferencing virtual classroom solution to enrich their hybrid and remote learning experiences. From a marketing perspective, last week we hosted our 3rd 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 Cultura customers such as AWS, VMware, Adobe, SAP and Salesforce, which is a new 2023 customer that uses Cultura 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.

Speaker 2

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.

Speaker 2

Salesforce Plus Incorporated Cultura powered AI enrichment services for content repurposing in alignment with our AI forward Einstein focus, particularly for events. Salesforce leveraged Cultura's AI to create automatic summaries and key takeaways for over 300 Dreamforce sessions, providing great value to F and Bs 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 Cultura 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, Cultura also released an AI assistant that streamlines the process of setting up webinars, providing users with intelligent suggestions and automated 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.

Speaker 2

We believe this assistance 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 Cultura TV Genie now engages TV viewers with tailored content suggestions. Lastly, on AI, we kicked off in the passing quarter a Cultura AI Accelerator program with the goal of integrating the best GenAI third party technologies with our open and flexible platform.

Speaker 3

We

Speaker 2

are already engaged with 15 pioneering GenAI startups that specialize in diverse fields such as video creation, editing, repurposing and analysis. Over 10 large Queltera 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 into the wider tech ecosystem. Beyond AI, during the quarter on the ENT product front, We introduced more event platforms features aimed at enhancing engagement and ROI. These include a new dashboard for session analytics, Interactive quick polls, improved recording management and deeper integration with our video portal.

Speaker 2

We also added a connector to Salesforce CRM, a new HubSpot integration and a theme editor for customization. On the M and P product 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 Cultura streaming platform to media companies who want to syndicate their content to 3rd 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. Culture is a U. S.

Speaker 2

Domiciled 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 Kulturians 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 Q3, we achieved an important milestone in our journey back to profitability, posting both positive adjusted EBITDA and positive cash flow from operations.

Speaker 2

Within 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 Cultura's comprehensive offerings, the industry headwinds we have been discussing in recent quarters continued to weigh down on both new deals and renewals. Lower budgets, increased price pressure and the 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 to revenue in the Q4, 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 $4,300,000 compared with negative $28,300,000 in 2022.

Speaker 2

We're also restating again our expectation of posting 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 twenty twenty three. This translates into a maximum forecasted annual cash consumption from operations of $11,500,000 compared with $46,800,000 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 twenty twenty four with sufficient cash reserves. With that, I'll turn it over to Yaron, our CFO to discuss our financial results in more detail.

Speaker 3

Thank you, Ron, and good morning, everyone. As I review the Q3 results Today, please note that I will be referring to a non GAAP metric adjusted EBITDA. A reconciliation of GAAP and non GAAP financials is included in today's earnings release, which is available on our website at www.investorsatkaltura.com. Total revenues for the Q3 ended September 30, 2023 was $43,500,000 up 6% year over year. Subscription revenue was $40,800,000 up 8% year over year, while professional services revenue contributed 2,700,000 down 14% year over year.

Speaker 3

The remaining performance obligation were 164,000,000 down 3% year over year, of which we expect to recognize 59% as revenue over the next 12 months. Annualized recurring revenue was $163,100,000 up 7% year over year. Our net dollar retention rate was 101% in the Q3 compared with 96% in Q3 2022. Within our E and T segment, total revenue for the Q3 was $31,100,000 up 3% year over year. Subscription revenue was $30,000,000 up 5% year over year, while professional services revenue contributed $1,100,000 down 24% year over year.

Speaker 3

Within our M and P segment, total revenue for the Q3 was 12,400,000 representing 13% year over year growth. Subscription revenue was $10,800,000 up 17% year over year, while professional services revenue contributed $1,600,000 down 6% year over year. GAAP gross profit for the quarter was $27,700,000 representing a gross margin of 64%. Within our E and P segment, gross profit for the Q3 was $22,800,000 representing a gross margin of 73%, up from 71% gross margin in Q3 2022. With our M and T segment, gross Profits for the Q3 was $4,900,000 representing a gross margin of 40%, down From 47% gross margin in Q3 2022.

Speaker 3

GAAP net loss for the quarter was $8,300,000.08 per diluted share. Adjusted EBITDA for the quarter was positive $300,000 improving from a negative $7,200,000 in Q3 2022. Turning to the balance sheet and cash flow. We ended the quarter With $71,100,000 in cash and marketable securities, net cash provided by operating activity was $1,700,000 in compared to $1,100,000 provided in Q3 2022. I would now like to turn to our outlook for the Q4 of 2023 and for the fiscal year ending December 31, 2023.

Speaker 3

In the Q4, we expect subscription revenue to be between 3% decline to 1% growth to between $38,400,000 $39,800,000 and total revenue to decrease by 7% to 4% to between $40,800,000 $42,300,000 We expect negative adjusted EBITDA to be between $600,000 and $1,100,000 For the full year, we expect subscription revenue to grow by 5% to 6% to between $160,300,000 at $161,700,000 and total revenue to grow by about 2% to between $171,500,000 and $173,000,000 We expect for the full year an edited adjusted EBITDA to be between $4,000,000 $4,500,000 In summary, despite the macro environment and our industry headwinds, we are slightly increasing in our total revenue, Subscription revenue and adjusted EBITDA guidance for the rest of the year and reaffirming our forecast to achieving a positive Cash flow from operation for the second half of twenty twenty three. Lastly, we are reaffirming our expectation to a positive adjusted EBITDA in 2020 And to achieving a cash flow from operations breakeven by the second half of twenty twenty four with sufficient cash reserves independent of our top line growth. With that, we will open the call to questions. Operator?

Operator

Yes. Thank you. At this time, we will begin the question and answer session. At this time, we will pause momentarily to assemble the roster. And the first question comes from Gabriela Borges with Goldman Sachs.

Speaker 4

Thanks for taking my question. This is Jake Teitelman on for Gabriela. Our thoughts are with you and all the Quelterra 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 Q4.

Speaker 2

Thank you, Jake, and 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. 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.

Speaker 2

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.

Speaker 2

And earlier, we referred to a 7 digit Deal with a new customer that's one of the largest investment firms in the world and they moved us from a competitor to power all their marketing communication and events, we're getting a lot more of that. So that continues. We also continue to see companies consolidate around Cultura. And so you're seeing both internal and external cases, which is unique for us. Half of our RFPs that we responded this quarter were combined internal and external and the ARPU continues to grow.

Speaker 2

And we also mentioned earlier about another 7 digit deal with an existing Fortune 500 tech company that's signed with us and they expanded from external into internal, sometimes it's the other way around and they grew their account to 2.5x the initial value. That's also typical. Win rate continue to be high this quarter, by the way higher than all quarters last year. So the change Isn't the percent of deal that we win versus lose, but again how many actually make it to the final process. And we also had a higher percent of booking this Compared to usual from channels, it's generally been choppy now it's deep into the double digit and we had 2 quite large Channel dropped competitors and start working with us this quarter and we expect it to impact future quarters as well.

Speaker 2

We saw less percent booking from professional services. We 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 does well to gross margin, so that's good. But we're still seeing good top of the funnel signs. I mentioned a number of new QBMs In the quarter, it grew sequentially and also SDR meetings are generally lower in Q3 because of the summer, but it was better year over year.

Speaker 2

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, No longer sales cycles, still reduced budgets, still price pressures. That means that deals get delayed again. The result is kind of a flattish 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.

Speaker 2

I would note though that the Productivity isn't lower. We have now 2 thirds of the salespeople that we had a year ago. So bookings are less by 25%, But we have 2 thirds of the salespeople that means on average we're actually selling better per salesperson. And so that's The combination of that, we can 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 Productivity is expected to go up.

Speaker 2

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. That's based on already deals that are in pocket. So it's a lengthy answer, but it gives you a feel for where the business is. Does that address your question?

Speaker 4

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?

Speaker 3

Yes. Thank you for the question. The one important comment, as Ron mentioned, that first of all, the decline that we Projected we projected it before in Q4 revenue. We don't see it continue into Q1 2024. So it's definitely changed direction.

Speaker 3

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 decline in 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 in the professional services.

Speaker 4

Thank you and good luck.

Operator

Thank you. Thank you. And the next question comes from Ryan Coons with Needham and Company.

Speaker 5

Thanks, Sebastian. 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 new 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.

Speaker 2

Sure. Happy to do that, Ryan. So yes, we said that in the last couple of quarters that AI is definitely in a prudent direction for us. Part of the benefit of Cultura 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.

Speaker 2

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 work 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 recommendations.

Speaker 2

So things like this could be actually used off the shelf with existing APIs that are out there for ChargePT and otherwise. 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 and 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 can 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.

Speaker 2

Right now what we've launched, we mentioned a leading Silicon Valley company that launched with us, That was around the short form content distribution together with We're repurposing of the content in order to address specific needs. So now that's done in an automated way. And the other one that we mentioned was Done with Salesforce at their event at Dreamforce, which was also successful. So it's already starting to hit. We also mentioned that we are working with a lot of ecosystem partners.

Speaker 2

As mentioned, we have some 15 already that are working with us, and there's many other customers, many customers already 10 that are formerly there and others that are joining and added into that, that are looking to consume these services. A big advantage of Cultura, given what I said earlier about APIs and workflows, is that we're open and flexible and we could easily insert 3rd party innovation coming from other companies. We've done that across our history. We have 120 different technology partners for the company at large beyond AI, And we expect to do the same here for AI. So a lot of plans and we're going to share them as we advance for both, ENT and M and P, we also mentioned some M and P applications that we have running.

Speaker 5

That's great, Ron. Thank you for that color. On the large deals, your 6 and 10 figure new deals you announced, any general trend there in terms of, are these Typically, still displacements of multiple vendors you're going into or some of them kind of new use cases for your customer base? Thanks.

Speaker 2

It's a combination of both. So, it's either so we mentioned one of them, for example, an existing bank that we have. It's an existing use case that we power, but they continue To grow organically, in the specific bank that we're discussing, it is the wealth management use case. If you recall, in that Pacific Bank in the past we've discussed, was when we started internally with a video portal for training and knowledge Sharing and then have moved to webcasting and then have moved to external use and ultimately have moved into video for wealth management where our tools enable a secure Management where our tools enable a secure distribution and creation and distribution of content for wealth managers for their customers in a mission critical way connected to all the compliance and security and approvals that are required in such a situation. In this specific piece, by the way, that customer had grown 10x in recent years and a deep, deep into the 7 digit figure as a bank and it started with 6 digit as an Not only are we adding use cases, but they're adding users and adding departments and so it continues to grow and grow.

Speaker 2

In a different example, which we've mentioned, it was the expansion from external into internal use case, where we started with Vents less than a year ago as a new customer and now they had moved into their internal TV for internal learning and collaboration. By the way, that customer is now in discussion with us around a very large deal to move all of their marketing use case To Cultura, which could be another very large seven digit deal, which as an example, budget pertaining, they already said, look, we wanted to do this in Q4, but we're rolling this into next year because of budgetary reasons. But we've already selected Quilterra. We believe you're the right partner. We'd like to do it with you.

Speaker 2

But budget wise, it's going to need to wait a bit longer to get the budget. And so this keeps on being the story. We enter from the window, we exit from the door or the other way around. It's either internal goes external, external goes internal, but the ARPU continues to climb and the land and expand has continued to do very well for us.

Speaker 5

That's really helpful, Ron, and best of all to everyone there at the company.

Speaker 2

Thank you, Ron. Appreciate it.

Operator

Thank you. And the next question comes from Patrick Walravens with JMP Securities. Please go ahead, Mr. Williams. Your line is live.

Speaker 6

Thank you. And let me add my thoughts and prayers, Ron, to you, your families and everyone. So number 1, why is subscription revenue and I know you answered it, but just very clearly for us. Why is subscription revenue going down from Q3 to Q4 by $1,000,000 to $1,500,000

Speaker 2

So I mentioned half of it, right? And I said bookings are flattish compared to last And at about 25% less. The other piece of it is retention, right? And I said last quarter That it went down and we expect it to continue to go down because we also said that we had that large deal that we announced that came in after the End of the quarter, but we mentioned it last time for the RPO change and it hit this quarter Q3. So we had another quarter of lower gross retention rates than usual in part because of that large single customer.

Speaker 2

Now annual gross retention rate in general is down by a few percentage points from the high 80s to the mid 80s. It's still decent, but it's not as good as it was before. By the way, E and T had lower gross retention rates this quarter than M and T. And in E and T, half of the churn, very similar to last time, was reduction and not full churn. So it's not customers completely leaving us, but spending less.

Speaker 2

Less than 10% of that reduction was because of product or services gap and the rest is budget price related services that are no longer needed. So Net net, what we're seeing is lesser gross retention and lesser new bookings, which are and have for this specific quarter ended up with a negative impact on subscription revenue. Now we're expecting and have expected this We've seen that come towards Q2 and already saw what's going to happen in Q4. But likewise, we could already see what's expected to happen in Q1. We're seeing this balance given the different numbers that we're seeing.

Speaker 2

The question is for next year, right? Is the gross retention going to

Speaker 3

tick up

Speaker 2

again? And is the bookings going to go up again? I already mentioned earlier the productivity is higher than last year Because we've also released some good people. And it's really a question of are we seeing better quarters. There's some upside in Q4.

Speaker 2

We're seeing a lot of interesting demand. There's some interesting deals. We're very cautious and obviously we don't forecast bookings, we forecast revenue. But by the end of Q4, we'll be in a position to tell you what's happening to booking. We have some reasons to be cautiously optimistic about Q4 maybe being different, but let's wait and see.

Speaker 6

Okay. And, I mean, under what circumstances would you say, okay, this is time to consider our strategic alternatives And consider selling the company.

Speaker 2

I think it's always been a reasonable legitimate option like it is for any single company on earth. I don't know that we've ever said that we're not or that we are. Our responsibility is to take care of our shareholders and we listen to them closely We've been in touch and continue to be in touch with different players. If and when an offer that makes sense would come our way, then we will reconsider it. But this has never been a yes versus no.

Speaker 2

It's always been devil's in the detail in the right time, in the right place, a deal could happen. We said that The same answer I've said time and time again by the way.

Speaker 6

Yes. Okay. And then lastly on a positive note, I really And

Speaker 2

I do want to just Mention one thing in macro because it's easy to kind of the whole industry right now is where it's at. You can listen to all the other players in the industry, 2 of which are 3 of which have already What you're hearing here is different. We're looking at a situation where there's some headwinds that are continuing by way of demand and by retention and pressures. This is happening to everybody. I must admit that most of the other folks out there that are public and receive their numbers have been declining aggressively this year or not.

Speaker 2

And so we're not as out of place as the others are. Is this a great year for us? Definitely isn't. Is there a lot more to hope for? Yes.

Speaker 2

We're meeting the numbers that we've said at the beginning of the year. We are. We're doing better than the numbers, both on adjusted EBITDA and revenue. And so The direction is as guided for the year, but we're hoping that next year is going to pull up. We need to wait patiently like all the other folks in our industry.

Speaker 2

And like I said, We do see top of the funnel activity that looks good and we do see continued strategic interest in moving to Cultura and we hear a lot of folks talking about moving to Quelterra when things are better, because when you talk about consolidation and the interest of one single platform for everything, A lot of them are saying, listen, for the immediate short term, it's an investment that we don't want to make. But for the mid to long term, it's The savings that we want to have and it's a better product that we want to have. And so we keep on hearing this. The question is when are we going to click on it? And again, we've been better than the other folks, but I think that when things turn around for the industry, we're going to continue to be on top and that's going to mean I think it's going to mean decent Returns that we've not seen over the last couple of years for sure, not us, more in the industry.

Speaker 2

Sorry, Pat, just muted Pat. Just go ahead.

Speaker 6

That's fine. Thank you very much.

Operator

Thank you. And the next question comes from Michael Byrne with Wells Fargo.

Speaker 7

Hey, this is Austin Williams on for Michael Turrin. Just wanted

Speaker 6

to ask on the EBITDA breakeven target. It's good

Speaker 7

to hear that that's restated for next year. But looking into 2024, where are you expecting the biggest areas of operating leverage to emerge?

Speaker 3

Yes. 1st of all, the one comment that I made in my statement is that we This trend of getting back to positive bottom line adjusted EBITDA wise is going to happen anyway that the revenue will develop We say dollar alone that at least for the short end, the gross margin will continue to be in the low to mid-60s. And I think it's a very solid statement right now. In the long term, it's definitely going to go more to the 70%. If we will be able to do it already next year, I'm not sure, but we are doing some major efforts around Production cost and around major agreement that we signed with 1 of our cloud providers, which give us much better unit economics.

Speaker 3

At the same time, we believe that in terms of our expense base, We don't need to increase significantly our sales and marketing and our R and D in order to push Revenue and to start seeing reacceleration of the revenue. So bottom line, keep the gross margin as it is right now, increase Keep the rest of the balance sheet, the expenses around the same levels and get back to Growth next year, it will enable us at least to be in a positive territory going into the beginning of the year.

Speaker 7

Okay, got it. And I also wanted to ask on the new AI assistant and some of the new AI features. What are you expecting this to open up from a monetization perspective? And how is this changing the expansion discussion with customers? Thank you.

Speaker 3

Sure. I'll take

Speaker 2

this one. Thanks for the question. It's early to say for us and for everybody. We do know that a residual Effectiveness is a dramatically greater amount of videos that are created and consumed and a higher ROI for wherever the videos are used. Will the immediate value come from a higher subscription for the feature?

Speaker 2

Or will it come from the greater use of the platform? That's the question. If you ask me, I expect it would be more the latter than the first. But it's still early days around that to be able to provide a clear enough answer. At this point of time, we're still in initial deployment time, but the focus is on creating value as opposed to optimizing and maximizing revenue.

Speaker 2

I believe that over the next few quarters that will take shape and then we'll be able to provide you a good answer. And by the way, this is the same answer for every single company

Speaker 3

in our ecosystem.

Speaker 2

It's still too early. It's still too early.

Operator

Thank you. And the next question comes from George Iwanyc with Oppenheimer.

Speaker 6

Thank you for taking my question. Ron, maybe following up on your comments about the sales productivity progress you're seeing. Can you give us Some perspective on the lower touch parts of the platform that you've put in place and the traction you're seeing there?

Speaker 2

Yes, I'm happy to do that. Look, we said that throughout the year that this is not the bigger focus, especially given our need to focus on the different aspects of the business, especially in a year like this. Now, we've improved our messaging framework and updated it in order to Have better flow around webinars, some of the clients have grown by about 180% quarter over quarter, In part, by the way, we've inserted AI into that. And we've also seen that the number of webinars that are created on the platform have increased 100% month over month. And so the KPIs that we're currently looking on are more adoption, user conversion that are not yet revenue KPIs for this year.

Speaker 2

And we said that throughout the entire year. I expect that next year at a certain point we'll be able to point on it. But I was clear as the year went by, we said the number one Revenue generator for our company has been the higher touch larger enterprise deals. And in between the different verticals between enterprise education Telecom, it has been enterprise. And in a year like this, we where everybody is required to focus more and not less, This is the number one place that we put most of our effort to complete this significant expansion to real time conferencing and into the new products being the event platform, the webinars for larger companies and the virtual classroom as well as the move to a new buyer from a CIO into a CMO for smaller companies from very large into A bit lower touch into SMBs, and even applying more distribution channels, as I mentioned, are working on.

Speaker 2

So that took a first step more So then doing the complete self serve credit card, small, small company type of sale. But we are advancing and we are seeing better and better results. And I do expect that the cavalry will arrive and that will become An increase in part of our revenue in the years to come is just not an immediate impact and it was never forecasted to be even before things turn around a bit for the year.

Speaker 6

All right. Thank you for that. And then, Yaron, maybe just a Question for you, with visibility that you saw on the net expansion rate this quarter, what are your assumptions and guidance? And what type of visibility do you have into the early part of next year from an expansion perspective.

Speaker 3

Yes. As Ron and myself mentioned before, We do see a very solid scenario that the trend of decline revenue in Q4 Not going to go with us into next year. Too early to see what's going to be The trend in terms of getting back to reacceleration, but it's definitely based on the deal to already closed in the last 3 quarters and the beginning of Q4, we see that the trend of decline in revenue in Q4, which by the way we focused it From the beginning of the year almost when we get the guidance is not going to continue into next year. It's too early to say when it's going to rebound back and We have to close the quarter to see to get a better visibility in terms of the booking, And hopefully, we'll be able to deliver better numbers going into Nexium.

Speaker 2

Amit, I had a comment about MDR first question. This quarter, we're still aligned with the general direction that we stated for the year and we still forecast the year to be at around 100% NDR for the year, which is well throughout the year we kind of said it's going to be. It could given what we just said about gross retentions and where they are in the last couple of quarters is expected to dip a bit for Q4 before graduates starting to turn back again. It's not going to be lower than earlier numbers posted by us. So there's nothing extra dramatic in the dip.

Speaker 2

But given the gross retention situation this year, which I mentioned earlier, it will dip a bit lower, But we made it at 100% for the year and we expect it to be 100% hopefully plus for next year.

Speaker 6

Thank you.

Operator

Thank you. And the next question comes from Matthew Niknam with Deutsche Bank.

Speaker 8

Hey, guys. Thank you for taking the question.

Speaker 9

Just one for me. On the competitive backdrop, can you just talk about what You're seeing there whether there's been any change in dynamics over the last quarter and if that's a factor that may be weighing in addition to macro on some of the bookings or gross retention trends. Thanks.

Speaker 2

Yes. Thanks for the good question. The answer is no. It's not weighing because Our win rate does not come down and it's a very high number, but that's higher than last year and higher than most years. So it's not that we're losing accounts to our competitors more so than ever before, and we're not seeing any player that's coming in and taking significant deals from us.

Speaker 2

And even from the gross retention statement that I said earlier, by and large, most of them are reductions, as I said earlier, as opposed to full on departures. And when they are a reduction, it's just because they have less money and or are pressuring to have a bit lower price and using less. On the contrary, what we're seeing is takeaways from competitors. I mentioned earlier, one of the big financial services is yet another big takeaway from a competitor around the webinarexternalmarketing use case that as far back as a year ago, we weren't able to do at all. This is an expansion for our product and we're able now to take away.

Speaker 2

It adds up to a few other big customers that we've taken from that particular competitor and we expect to have many more because again, we're just entering the pearly gates of being able to do that that we weren't able to do before. So no, we're not Seeing any of the competitors out there win more business compared to us. We're just seeing a general The pressures of the industry that are causing everybody to be a bit slower. That's all.

Speaker 10

Very helpful. Thanks, John.

Speaker 4

Thank you.

Operator

Thank you. And this concludes the question and answer session. I would like to turn the floor to Ronny Castillo for any closing comments.

Speaker 2

Yes, I want to thank you all for your questions and also for those that have commented on Cetacea in Israel. We also are Heibergen and send our big hugs to all the Quilterians that are working there. But we are a global company and pulling forward and doing well. I'd say from a macro perspective, again, there's a lot of discussions here about the industry headwinds. I think by and large, we're delivering on the numbers that we've Committed to the beginning of the year, we have achieved adjusted EBITDA earlier, positive earlier than said and cash flow positive, and we are seeing a lot of top of the funnel Trends that are taking us to the right direction.

Speaker 2

I think we have placed for some hopeful good news around Q4 bookings and the general direction for next year hasn't changed for us. So we're looking forward to what's to come. I want to thank you again for your continued support and have a great remainder of the week. Take care. Bye bye.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
Kaltura Q3 2023
00:00 / 00:00