Kaltura Inc Q2 FY2021 Earnings Call

Good morning everyone and welcome to the Kaltura Second Quarter 2021 Earnings Call. This call is being simultaneously webcast on the Company’s website in the Investors section under Events. For opening remarks and introductions, I’ll now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

Thank you, and good morning. With me today from Kaltura are Ron Yekutiel, Co-Founder, Chairman and Chief Executive Officer; and Yaron Garmazi, Chief Financial Officer. Ron will begin with a brief review of the business results for the second quarter ended June 30, 2021 and an overview of Kaltura. Yaron will then review the financial results for the second quarter, followed by the Company’s outlook for the third quarter and full-year of 2021. We will then open the call for questions. Please note, this call will include forward-looking statements within the meaning of the Federal Securities Laws, including but not limited to statements regarding Kaltura’s 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. Additional information that could cause actual results to differ from forward-looking statements can be found in the Risk Factors section of Kaltura’s prospectus, filed with the SEC on July 22, 2021, pursuant to Rule 424(b) and other periodic SEC filings, including the quarterly report on Form 10-Q for the period ended June 30, 2021 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. All material contained in the webcast is the sole property and copyright of Kaltura with all rights reserved. Please note, this presentation describes the non-GAAP measure, adjusted EBITDA, which is not prepared in accordance with US GAAP. For a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP metric, please refer to our earnings release. Now, I’d like to turn the call over to Ron, Co-Founder, Chairman and Chief Executive Officer.

Thank you, Erica. And thanks to everyone for joining us on the call this morning. We’re excited to report our first quarter as a public company. I want to start off this special call with a few quick acknowledgments and thanks. First for our amazing team, employees, partners, and long-time shareholders, or as we call ourselves, Kalturains, for always dreaming big for your unwavering dedication, passion, resilience, and steadfast commitment to our founding values of openness, flexibility, and collaboration. Second to our loyal customers, for your partnership, trust, and support. We look forward to continuing to videofy the world with you. As they say in the Olympics, faster, higher, and stronger together. Lastly, most importantly, to our new shareholders, thank you for your vote of confidence. We’re excited to have you join our extended family. Our journey to power any video experience for any organization has only just begun. We are all energized and thrilled to enter this new chapter and strongly believe that the best is very much ahead of us. I’ll start this morning with just a few opening financial highlights from the second quarter, then, because it is our first earnings call, I want to take some time to provide an overview of our business and market opportunity as many of you may be new to the Kaltura story. After which, I’ll provide more details on the passing quarter and the road ahead. We reported a very strong second quarter, fueled by robust bookings, sales force productivity, and net dollar retention rates. Our revenue for the quarter was $41.6 million, up 45% year-over-year. Subscription revenue for the quarter reached $36.5 million, an increase of 46% from the prior year and represented 88% of total revenue. Our annual recurring revenue run rate grew to $145.4 million, up 46% year-over-year, and our net dollar retention rate continued to increase to 121%, up from 105% one year ago. We’re very excited about the results of the passing quarter, but before I share more details about it and the road ahead, for the benefit of those who are new to Kaltura, I want to quickly provide a summary of our business and why we believe the best is yet to come. If you participated in major virtual events in the past year, it was possibly conducted using Kaltura. If you’re studying in a university or have graduated from one in the last decade, you may have used Kaltura when you created or consumed videos in class or remotely. If you work at any large organization, you also possibly watched internal videos and town halls and engaged your customers with videos using Kaltura. If you are a TV subscriber of a major OTT provider like Vodafone, you may have also watched your favorite series using Kaltura. Video is everywhere and increasingly so is Kaltura. We started Kaltura in 2006 when online video was just in its infancy and embarked on a mission to build a single, open, and flexible platform that would power any video experience for any organization. Over the years, we’ve built our robust Video Experience Cloud that includes live, real-time, and on-demand video products, solutions, and developer tools for organizations to drive communication, collaboration, learning, and entertainment for many millions of people at home, work, and school. We are recognized as the leading vendor in the enterprise video content management market, offering a broad set of products and capabilities for on-demand and live, both for web and TV solutions. In 2020, we expanded into the real-time conferencing space, focusing primarily on experiences that require both real-time conferencing as well as advanced live and on-demand content management capabilities. Our Video Experience Cloud today is comprised of three components. First, a set of media services that include hundreds of video APIs for on-demand, live, and real-time video, developer tools, and video TV content management systems. We license these media services to tech companies that want to add video workflows to their own products. We also built all of our own products and solutions that go throughout the top of these same media services and APIs, which make all of our offerings very flexible, interoperable, and easy to customize and integrate, avoiding traditional silos and redundancies. Second, on-demand, live, and real-time video products that cater to all industries, powering both internal video needs of organizations with their employees, as well as their external needs with their customers, partners, and prospects. Our products include a video portal, assistance for channels, our system for sending video messages, and after adding real-time conferencing last year, also offerings for webinars and virtual events. Third, industry-specific video solutions, currently catering to two markets: education and media & telecom. We offer video solutions that power in-class and remote teaching and learning for educational institutions. This includes a video extension for all popular learning management systems, a lecture capture solution to record or stream live lectures, and starting from 2020, also a virtual classroom solution for remote and hybrid teaching and learning. We also offer media and telecommunications companies a platform to launch and manage their cloud-based over-the-top TV service, including live on-demand and catch-up TV, both subscription-based and ad-based. As of June 30, 2021, we have over 1,000 customers across four markets. Three of them, Enterprise, Education, and Technology, are reported together as a unified segment, and the fourth, Media & Telecom, is reported as a separate second. Among these customers are 25 of the U.S. Fortune 100, more than 50% of the top U.S. research educational institutions, including seven of the eight Ivy League schools, and we power more than 50 major cloud TV initiatives for large media and telecom companies around the world. We sell our solutions primarily through direct sales teams and account teams that are also organized based on these four customer markets. To date, we have invested primarily in increasing the scope and depth of our offerings. At the same time, we’ve accelerated our year-over-year revenue growth from 12% in 2018, to 18% in 2019, and 24% in 2020, and from 17% in the first quarter of 2020 to 46% in the first quarter of 2021 and now 45% for the second quarter of 2021, up from 21% in the second quarter of 2020. We accomplished this acceleration without materially increasing our sales and marketing spending over 2019 and 2020. In the fourth quarter of 2020, we began investing significantly in sales and marketing expenses to drive revenue growth, and we expect this trend to continue for the foreseeable future. Our revenue acceleration to date was achieved primarily through growing our efficiency and net dollar retention rate metrics. During 2018, 2019, 2020, and the first quarter of 2021, the lifetime value of our customers exceeded 5, 7, 11, and again 11 times the cost of acquiring them. Our net dollar retention rate grew from 105% in 2019 to 107% in 2020 to 116% in the first quarter of 2021. Now, in the second quarter of 2021, it continued growing to 121%. The rise of both metrics is attributed to increased demand into a growing average ARR per customer, which is fueled by increased consumption levels and a growing number of offerings purchased by each customer. To date, half of our customers have purchased three or more of our offerings and use them for a range of use cases across organizations. As we look into the future, all of us at Kaltura are more excited than ever. We’re finally accelerating our investment in sales and marketing on the heels of established leadership across several large markets, attractive unit economics, and proven operational efficiency. We only recently started commercializing our new and exciting products and solutions from 2020, including webinars, virtual events, and virtual classrooms. We plan to continue to create innovative products and solutions for our customers. We’re also planning to go down market to cater to smaller customers, including SMEs, with new self-serve and low-touch products for companies and developers, supported by new channel distribution partners. We have many growth drivers, and our opportunity is large and timeless. This brings me back to the second quarter of 2021. I would like to give you more color on what we’ve done in the past quarter from a go-to-market and technology development perspective, what development we plan to do next, and how we currently see our growth engine. First, from a go-to-market perspective, this was another great quarter. We once again saw strong traction, robust bookings, retention, and an increase in our average ARR per customer. On the enterprise front, Kaltura continues to position itself as the go-to platform for high-stakes virtual events. We sold our new virtual event product to large organizations, including Fortune 500 companies, and delivered major events around the world, during the quarter, some including over 100,000 registrants. We also had initial virtual event customers renew their contracts and extend them for additional events. While on the topic, I'm delighted to announce today the upcoming launch of a new Kaltura-led industry event in the field of virtual and hybrid events. It is called Virtually Live by Kaltura and it will take place virtually this November 9th. Virtually Live will focus on the transformation of live, virtual, unified, and hybrid events and their impact on the marketing funnel. We expect market peers, business leaders, and marketing technology leaders to join us to re-imagine how events would look in the years to come. We will deliver the events on Kaltura’s virtual event platform, which has hosted some of the tech industry’s biggest events this year. Beyond virtual events, video messaging continues to gain popularity in the enterprise market with a major financial institution transitioning to video-based communication with its customers using our video messaging product. We’re also seeing more global companies switch over to our virtual classroom solution from other virtual learning platforms, including one of the major consulting firms, and most of our customers continue to purchase multiple offerings. So, all of our enterprise products remain very much in demand. Educational institutions are continuing to grow their dependence on video for learning, both real-time and on-demand, and we’re continuing to strengthen our position as the central media repository for educational institutions. Our tech customers that are embedding our media services in their own platforms have continued to grow their usage materially, and this remains the highest contributor to our net dollar retention rates. In Media & Telecom, we continue to broaden the footprint of our cloud TV platform. This quarter, our longtime customer Vodafone launched their Kaltura powered Vodafone TV service in Germany, which is their largest TV market. In Q2, we closed an important deal to power cloud TV for a large telecom company in France. Second, from a technology innovation perspective, we continued with our fast pace of innovation this past quarter across our live, real-time, and on-demand stacks, focusing on driving convergence across live. We finished migrating our customers to our newly built, modernized live streaming cloud infrastructure, which is based on a new powerful Kaltura live streaming engine. It provides broadcast-quality live playback, user engagement, and real-time analytics and addresses growing scale and viewer concurrency, ideally suited to power large, high-stakes virtual events and the cloud TV initiative. We’ve also added a set of new capabilities to our Simulive experiences that allow our customers to pre-record content and simulate a live broadcast, relieving much of the stress that accompanies live production. Simulive has been in very high demand in the past months, especially for virtual events of all types, and remains an important area of investment for us. On video on demand, we released a new Kaltura plug-in for Zoom customers, allowing hundreds of joint customers to better manage Zoom recordings on Kaltura. We upgraded management capabilities, both within Kaltura and in Zoom, and have automated certain flows for our education customers that use our video solutions for learning management systems. On real-time conferencing, we upgraded our virtual classroom and webinar products with more advanced content management capabilities for breakout rooms, and also added interactive advanced functionalities for simple real-time polls. I’d also like to highlight several new partners that have joined our tech partner marketplace, which includes more than 125 companies, further extending our core capabilities and adding value to customers. I’d like to welcome B.live, a live studio platform, Idomoo an automated video personalization platform, and Pigeonhole, an advanced communication tool for virtual and hybrid events. A few words about our plan for technology innovation going forward. On the media services side, we plan to continue to invest heavily in our real-time video infrastructure, which is the most recent addition to our technology stack. For the users of our on-demand experiences, we’re investing in enhanced editing and personalization tools. We also started our journey towards hosting our platform across multiple clouds to facilitate strategic partnerships with several cloud providers. Lastly, we’re building the infrastructure for self-serve purchasing for our media services to cater beyond large tech customers, also to tech start-ups and the broader developer community. On the cross-industry product side, we plan to continue investing heavily in our virtual events platform and to combine our advanced branding capabilities that are ideally suited for bigger companies with more self-serve, amplified event management capabilities that are better suited for smaller companies and events. We’ll also utilize our infrastructure for self-serve purchasing to launch several self-serve products that cater to specific departments and also to SMEs. For the education market as well as for learning and training use cases in the enterprise, we’re building a new infrastructure to easily create and edit interactive, personalized videos to facilitate personalized learning and engagement paths. For media companies, we’re putting together a more simplified end-to-end version of our robust offering designed to allow them to launch advertising or subscription-based direct-to-consumer services in a matter of weeks instead of months, including the same or even more features offered by global streaming services without the need to procure individual tech stack components. Third, and last, how we currently see our growth engine? We are on track with increasing our sales and marketing spend and ramping up new sales and customer success representatives who should start contributing in the second half of this year. The average productivity of our sales team so far remains as planned. As discussed, we’re seeing good traction and a growing demand for our new products and solution releases of 2020. We’ve made good progress in growing our R&D spend, and we’re starting to develop a new set of products and solutions, including those that will enable us to go down market to cater to smaller organizations. In summary, another great quarter behind us across all our markets and a strong outlook for the rest of the year. With that, I’ll turn it over to Yaron, our CFO, to discuss our financial results in more detail.

Thank you, Ron, and good morning, everyone. As I review the second quarter results today, please know that I will be referring to our non-GAAP metrics. The reconciliation of GAAP to non-GAAP financials is included in today’s earnings release, which is available on our website. Given that this is our first quarter as a public company, I want to start by sharing some perspectives about our business model, our financial profile. Then I will walk through highlights from our second quarter, and finally, I will close with the guidance for the third quarter and the full year before we open up the call for questions. As Ron mentioned, we organize our businesses into two reportable segments, Enterprise, Education and Technology or EET, and Media & Telecom or M&T. These segments share the common underlying platform, consisting of our API-based architecture as well as the unified product development, operation, and administrative resources. Our EET segment includes revenue from all our products, industry solutions for education customers, and media services, excluding media services for telecom customers, as well as associated professional services for those offerings. Subscription revenues are primarily generated on a per full-time equivalent basis for on-demand and live products and solutions, per host basis for real-time conferencing products and solutions, and on a per participant basis for the Virtual Events product. Contracts are generally 12 to 24 months in length, and average implementation time ranges from three to six months. Our M&T segment includes revenues from the TV solution and media services for media and telecom customers, as well as associated professional services for those offerings. Revenues are generated on a per-subscriber basis for telecom customers, on a per video play basis for media customers, contracts generally last two to five years, and average implementation time ranges from 9 to 12 months. Speaking broadly, our M&T solutions require greater upfront resources for implementation, resulting in a longer period from initial booking to go-live and a higher proportion of professional services revenue as a percentage of overall revenue. In the long-term, we expect the gross margins for the M&T segment to improve due to the lower mix of professional services revenue, improved efficiencies in both production and professional services costs, and an increase in the proportion of revenues from media customers, which generally entail simpler deployments compared to telecom customers. From a go-to-market standpoint, the vast majority of revenue comes from existing customers with whom we are in active dialogue and have a visibility into their expected usage of our offerings. We focus our sales and marketing efforts on large organizations and sell our solutions primarily through our direct sales team and accounts team. We currently have a direct sales team, grouped by offering type and target customers, and we leverage reseller relationships globally to help market and sell our products to customers worldwide, especially in regions where we have limited presence. Moving to our quarterly financial results: total revenue for the second quarter, ended June 30, 2021, was $41.6 million, up 45% year-over-year. Subscription revenue was $36.5 million, up 46% year-over-year, while professional services revenue contributed $5.1 million, up 36% year-over-year. Remaining performance obligations were $156.3 million, up 34% year-over-year, of which we expect to recognize 65% of the revenue over the next 12 months. Annual recurring revenue was $145.4 million, up 46% year-over-year. Revenue benefited from a continued strong booking level and acceleration of the net dollar retention rate, which was 121% in the second quarter, compared to 105% in Q2 2020. Within our EET segment, total revenue was $30.2 million, up 61% year-over-year. Subscription revenue was $27.2 million, up 53% year-over-year, while professional services revenue contributed $3 million, up 195% year-over-year. Within the M&T segment, total revenue was $11.4 million, up 14% year-over-year. Subscription revenue was $9.3 million, up 28% year-over-year, while professional services revenue contributed $2.1 million, down 24% year-over-year. Gross profit in the quarter was $26 million, representing a gross margin of 62%, which equals the gross margin of Q2 2020. Research and development expenses were $11.8 million, 28% of revenue compared to 23% in Q2 2020. The increase was driven by additional headcount and payroll expenses, and we continue to invest in technology and innovation. Sales and marketing expenses were $10.5 million, 25% of revenue compared to 23% in Q2 2020. This increase was driven by additional sales and marketing investments, including headcount and personnel-related expenses. We intend to continue to invest in sales and marketing as we expand our sales force and marketing efforts to leverage our position in the market and to capture significant opportunities in front of us. G&A expenses were $9.4 million, or 23% of revenue compared to 13% in Q2 2020. G&A reflects an increase in headcount and payroll expenses. The GAAP net loss in the quarter was $2.7 million or $0.37 per diluted share. Adjusted EBITDA was negative $1 million, decreasing from $3.3 million in Q2 2020. This result is in line with our plan to increase our spend in order to further fuel growth, as discussed earlier. Turning to the balance sheet and cash flow, we ended the quarter with $29.8 million in cash and short-term investments. Net cash provided by operating activity was $0.9 million in the quarter. I would now like to turn to the outlook for the third quarter and the full-year of 2021. For the third quarter, we expect revenue of $41.5 million to $42.5 million with a negative adjusted EBITDA of $6.5 million to $4.5 million. For the full-year, we expect revenue of $162.5 million to $164.5 million, with a negative adjusted EBITDA of $17.8 million to $14.8 million. In summary, our strong new business pipeline, accelerated net dollar retention rate, and after a long time, also a significant increase of our sales and marketing resources will enable us to support a robust recurring revenue growth rate. With that, we’ll open the call for questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Daniel Bartus with Bank of America. Please go ahead with your question.

Hey guys. Congrats again on the IPO, and thanks for taking the question here. First, I wanted to ask about the EET strength. Sounded like you’re certainly seeing broad demand, but can you help us understand what’s driving that strong growth a little bit more, by maybe ranking which products are driving it most in Q2?

Sure, Dan. Thank you for joining, and thank you everybody else for your time here again. Broadly, it’s been a record new booking quarter for us. The previous record was Q1 2021. Strong contribution came across all markets. We had a similar contribution to bookings, by the way, between new logos and upsells. For EET bookings specifically, a significant part of our deals in the first half of the year in the second quarter were for new products: virtual events, webinars, virtual classrooms, along with town halls. The majority of our new business supported live and RTC experiences. So, that’s something we started last year. The town halls had been there for a while, but all the new ones have been added. The fact that this now represents half of our business for EET is quite significant. Our upsells were balanced between the acquisition of more products in line with our multi-product approach per customer, and we had also an increase in the number of licenses or in consumption usage; I’d say it’s generally a 50-50 split. On a geo basis, EET deals were mainly in North America, while M&T deals were mainly in EMEA. There’s also an increase in the percentage of bookings from channels, which we expect to see more of throughout the year. One small interesting note is that we started seeing a reduction, as expected, in the percentage of professional services bookings from total bookings. That’s both, by the way, in EET and M&T. That’s because of what we expected to see as increased productization, and the trend is also starting to affect revenue impact as well. Average revenue per user remains strong as it was before. The pipeline remains robust. We’re absolutely on track for a great strong year. Maybe Yaron, you want to add a bit about how this affects revenue in EET and maybe also in M&T. Go ahead.

Yes. Thank you, Ron. And Dan, thank you for joining and for the questions. Yes, obviously, as Ron mentioned, we see the growth coming across the board from all segments. By the way, it’s not just EET that’s growing very nicely. We are not showing booking numbers, but I can tell you that it’s also on M&T. We saw very significant booking momentum going into this quarter. Actually, the booking that we had for this quarter was basically equal to the same booking that we had last year for this quarter. So, down the year, you would probably see a very nice catch-up in the revenue coming also from this segment. The other trend, which is very important, and Ron mentioned it: professional services as a percentage of revenue is going down. The acceleration that we see in revenue, both in Media & Telecom, and the Enterprise, Education & Tech OEM is accelerating very nicely, especially in recurring revenue.

Maybe a couple points: the fastest growing revenue segments are Tech OEM followed by Enterprise, then Media & Telecom. And just to clarify, Media & Telecom was the only market that was growing under 30%. However, as we mentioned now, it’s kind of rebounding because of significant bookings in post-COVID for Media & Telecom. So, we expect that to grow strongly into the future. Does that answer your question, Dan?

Yes, certainly. Thanks for all the color, guys. And then, as a follow-up, I wanted to ask about net retention rate a bit because that’s improving nicely too. Just curious at a high level, with all your new products, where do you think the net retention rate could go from here? And maybe more specifically, Yaron, what do you have baked in your second half guidance for net retention rate? Thanks.

Yes. Let me kick it off and then pass it over to Yaron. Regarding retention rates, in the second quarter, we had about a quarter of our yearly renewals. We had even better gross retention rates, but we’re not reporting on those. Just to understand, even Q1 and last year Q2, they continue to be best-in-class for the enterprise industry. Our unit churn is also very low, similar to our dollar churn. Gross churn of our new 2020 cohorts of customers was not different from that of the other cohorts before. So much of what’s fueling us forward is upsells, but also bear in mind that the gross retention is looking really solid. Yaron, do you want to talk about net dollar retention? Go ahead.

Yes, a few more comments on the net dollar retention rate. First of all, it was growing very nicely this quarter, as you mentioned, to 121% from 116% last quarter. Just to remind us, the two years before it was 105% and 107%. The growth and acceleration we see are consistent across the board. We are not breaking out specifics for guidance going forward for the net dollar retention rate. However, I can tell you that we see growth in usage and users mostly for Media and Telecom and Tech OEM, with the introduction of the new products coming across the board. We expect to see this accelerating going forward, but we will not be sharing specific guidance for the numbers going forward for the net dollar retention rate. However, I can assure you that the momentum we see is very strong, and we feel comfortable with this number going into the next two quarters of the year.

One last comment: we reported a continued increase in the average revenue per customer, which grew by another 27% year-over-year. That’s fueled both by new, exciting, and big products that we’re adding and by people upselling, but also just by the nature of adding multiple products per customer, as has always been the case. We've stated that half our customers are using three or more products. That’s continuing, which shows a strong trend.

Thank you. Our next question comes from the line of Michael Turrin with Wells Fargo Securities. Please proceed with your question.

Hey, there. Thanks. Good morning. Q2 metrics continue to accelerate the outlook you’re providing, yet it does suggest a bit of a slowdown in terms of growth rate, especially heading into Q4. Is there any commentary you can provide around just the overall approach to guidance? How much conservatism, if any, is built into that second half outlook? I know Ron mentioned some of the investments you’re making should start to ramp in the back half as well. I’m wondering if those could present upside potential or anything else you can provide in terms of the outlook and color on that. Thank you.

Thank you, Mike. I’ll let Yaron start off, and then I’ll add a few points after. Go ahead, Yaron.

You saw the guidance and the numbers we provided for the quarter. You’re right that there’s been a deceleration in the growth rate in the second half of the year. However, it’s much slower than what we expected to see. The numbers are better than what we anticipated regarding the deceleration. The growth we provided for this year is roughly 36% for the overall company for the full year. We started two quarters at around 45%. So, you can see that there’s some kind of deceleration in the second part of the year as we anticipated. A few points that are crucial: if you look at the blend between recurring and non-recurring revenue that we had in Q4 last year, which impacted the growth rate of this year, the major part of the increase in Q4 last year was related to non-recurring revenue; actually 18% of that revenue was non-recurring. If you look at the trend going into the first half of the year, the non-recurring revenue from professional services revenue is just 13%. We believe that this trend will continue into the rest of the year. If you calculate the growth rate of the recurring portion of direct business, it’s definitely not decelerating compared to the overall company, which is currently at 36%. The key aspect is that we are increasing investment in sales and marketing, and the fruits of the new products will start becoming visible as we go forward. As Ron mentioned, it is critical, and we are working hard to exceed those numbers.

We expected a slowdown in Q3 and Q4, and we’ve accounted for that in our model, primarily because we’re comparing post-COVID to post-COVID. In the first half of the year, we benefited from all the bumps from COVID, and as we advance, that’s affecting us. However, it’s not exclusively due to COVID. We’ve maintained our sales and marketing spend consistently over the past years. Improvement primarily came from enhanced efficiency, which continued from the years before. This means we’re leaning towards getting more sales personnel onboard. Our sales team has been increased since the end of last year and the beginning of this year. They are mostly ramping up in the second half of this year. It’s essential to understand that it takes time for them to acclimate to customer relations and for subscription revenue to be recognized post deals. It's worth noting this will mainly contribute more prominently in 2022. Moreover, other than the short-term expectations for the next few quarters, we anticipate bolstered activity with channels and strategic partners, which will support growth. We are observing great traction in our new products and have only begun scratching the surface with offerings like virtual events, webinars, and classrooms, which are significant in what we sell today. This trend is just beginning, and we are optimistic about it with our continued investment in the sales team.

Regarding the guidance we provided, we maintain that we will strive hard to exceed these expectations.

Our next question comes from the line of Matt Niknam with Deutsche Bank. Please proceed with your question.

Hey, guys. Thanks for taking the question. Congrats on the IPO. I have a question about demand. And I think, Ron, you may have alluded to this a little bit, but if you could elaborate. We’ve heard some peers beginning to mention moderation or rightsizing of demand in recent weeks, possibly as they begin to lap some of the peak initial benefits from COVID last year. I’m just curious if you’ve seen anything similar across your core verticals. And as a follow-up, with the proliferation of the Delta variant, I wonder if that’s had any meaningful effect or change on customer demand in recent weeks. Thanks.

Thanks for the question, Matt. We have not seen a slowdown in demand. One thing to remember for us as a company is that we’re very horizontal, addressing a lot of different markets, such as enterprise, education, media and telecom, tech OEM embedded in all these areas. Additionally, we’re not one of these companies that got a bump during COVID due to consumption and usage before seeing a slowdown. If anything, our gross margins were pushed down because of that. We are, however, observing slightly reduced consumption levels, which are starting to improve our gross margins, and we can delve more into that. But we are not seeing any softening in our pipeline; in fact, we have many new products that are exciting and which we started adding late last year. We are witnessing much demand for these products which were not catered to in previous years. So, overall, we are seeing strong momentum. Regarding the Delta variant, we don’t perceive much impact. The reason is that we have support for remote work and remote education. The underlying trends we enable for our customers have been present for a significant period and continue moving forward. For instance, in teaching and learning, it’s not just about distant education but continues to trend towards a flipped classroom model where students might return to physical classrooms to receive support but are engaging with content from home. We see these trends continuing and we enjoy strong renewals as well. Recently, we have seen a lot of renewals for virtual events for both virtual and hybrid settings. Even organizations that were considering physical events are opting for back-to-back virtual events. They see that as a long-term tool for engaging customers and communities, transforming traditional marketing methods. So, in summary, we are not observing any signs of softening currently. Does that answer your question, Matt?

It does. If I could throw in one last follow-up. You talked about potential moderation in consumption, which could be a tailwind for your gross margins, and in your commentary, you mentioned that professional services may be declining as a percentage of total revenue. Both of these factors suggest there could be upside for profitability. I’m curious how that might affect your roadmap or visibility towards a return to profitability in the next couple of years?

This is a good opportunity for Yaron to touch on gross margin. I will add a few points, but let’s first discuss gross margin. Go ahead, Yaron.

As noted, the gross margin for the quarter was 62%, even improving compared to Q1 this year. Moreover, the challenges we faced at the beginning of the year, or even at the end of the last year due to moving to public cloud, are now behind us. We are now back to pre-COVID gross margin levels, both in the Enterprise, Education, and Tech OEM, as well as in Media & Telecom. Actually, we see a significant improvement in gross margins for Media & Telecom, especially as we move forward. This improvement is driven by the decreasing proportion of nonrecurring revenue, as you mentioned, especially in the first part of the year. We expect this trend to continue into the future. If you take the overall gross margin profile, we do see a scenario that it will remain steady or increase compared to before. We are not giving any specific guidance on gross margins, but we don’t expect significant drops below 60%, given the pressures we faced recently. Our long-term profitability plan is aligned with our overall enhancement of our gross margin as it fosters our ability to improve long-term profitability. We’re not changing our approach to achieving profitability in the coming years.

To add, our current gross margin at 62% is not too far from our pre-pandemic levels, which were around 63%. We’ve seen quarter-over-quarter improvement in our subscription gross margin due to the factors mentioned previously, along with our move to AWS, and the overall return of consumption levels. We’re optimistic about gross margin improvement, particularly since the proportion of professional services versus recurring revenue is anticipated to continue decreasing.

Thank you. Our next question comes from the line of DJ Hynes with Canaccord Genuity. Please proceed with your question.

Hey guys. Congrats on the IPO and nice start here. Ron, I was hoping you could talk a little bit about the ed tech market and where they are in terms of buying cycles. I would have thought that a lot of higher ed and even K-12 buyers would have made their video bets last year during the pandemic. I’m wondering if there’s any risk that sets us up for softness in the vertical over the next couple of buying cycles. Can you just give some insight into that dynamic and what you’re seeing in that market?

Absolutely. We power half of the R1 schools in the U.S., including seven of the eight Ivy League schools. We’ve been for years the leading video content management system that runs and manages everything video for all these different schools. Throughout the years, we’ve started moving down market. Part of what we're doing now is moving deeper into K-12 schools and focusing more on governmental deals that span full countries and regions. More generally, we've transitioned from VOD to live and now to RTC, and with the addition of our virtual classroom product, we're in a great position to consolidate the full stack between on-demand, live, and real-time offerings—something we hadn’t previously had. We're seeing initial acquisitions of these integrated products now. It’s important to point out that we are integrated with Zoom and Teams along with other RTC providers, and we've launched enhanced integration this quarter, providing even greater value for those using our services in conjunction with major platforms. Some schools may have temporarily patched their systems, yet as they anticipate the future, they look beyond merely adding remote capabilities; they're eager to fundamentally disrupt how education is delivered in the post-COVID world. They aren't looking for piecemeal solutions, but rather a comprehensive end-to-end remote solution integrating on-demand, live, and real-time functionalities. This places Kaltura in a prime position to take advantage of developments in the educational market.

Got it. Yes, that makes sense. As a follow-up, I want to ask about the strategy with your meeting solutions. Investors hearing about that category may immediately think about competitors like Zoom, Teams, Meet. How is Kaltura differentiating in this space? Is this really about embedding the rest of your portfolio around it? Perhaps you could discuss that a bit. Thank you.

First, we’re not aggressively selling for the collaboration and communication use case for RTC or going directly after Zoom or Teams. The RTC is a component that contributes to our learning and development internally for training with the virtual classroom for schools, combining with webinars, and importantly, forming part of our overarching solutions for marketing, fully integrated into the virtual events platform and any events we offer. Kaltura’s strength lies in consolidating offerings across VOD, live, and RTC approaches, rather than providing standalone RTC solutions. Will we venture into direct competition for consumers or SMBs with pure-play meeting platforms like Zoom and Teams? Less likely, but there is potential. We see the larger enterprises consolidating vendors capable of addressing all their varied video needs. Kaltura is the premier provider in this respect. However, we are also integrated into other providers, and we serve as the video content management platform helping unify the tools from Zoom and Teams, as our clients often seek comprehensive management in one place. This covers areas that extend beyond just Microsoft products. The short answer: not going head-on against competitors like Zoom and Teams in the lower-end market. However, we are focused on integrated workflows tailored for learning, marketing, and events on an enterprise level.

I think you mentioned in the script that the channel is improving as a mix and helping drive some bookings there. I was curious what you would attribute the strength of channel partners to. How are the cloud providers ramping as a partner at this point?

Yes. Channels for years contributed mid to high-single-digit percentages in our new bookings. They are now starting to ramp more significantly. Historically, the challenges included how self-serve or low-touch our products were. When deploying things through channels, the solution needs to address a wider range of customers and be relatively simple to sell, integrate, and deploy. That has not always been the case for us. With the addition of RTC capabilities, we’re developing solutions catering to smaller companies. We’re targeting SMEs, whether in K-12 for schools, smaller media companies, or tech developers on the tech OEM side. This opens the door for channels to become much more relevant, and we’re starting to see that. Some of these channels consist of value-added resellers and integrators with specific affinities to targeted industries. The channels that have our attention currently are the larger ones catering to Infrastructure-as-a-Service. Video acts as a major consumer and accelerator of IaaS consumption, allowing synergistic partnerships. AWS, in particular, stands out as a valuable partner, helping us co-sell and resell our solutions through their marketplace, benefiting them from a significant wave of resource consumption along with us. We are in the process of training salespeople in such channels and exploring a multi-cloud strategy to engage with more partners. Good things are on the horizon.

Thanks for the question. I want to follow up on your channel model and the types of partners you’re targeting. It seems like a lot of Infrastructure-as-a-Service partners. As they look at their solutions, what other types of products in their portfolio would they be bundling with Kaltura? Thanks.

Thank you. It varies depending on the type of partner. If they’re a standard IaaS provider, then it’s sufficient that we are consuming storage delivery and compute resources, which we do overall. The question becomes whether they are a value-add provider offering SaaS solutions. This can work in two directions. They might have a full OEM deal using our Platform-as-a-Service to videofy their products. We have announced such relationships with many players, including Oracle, adding video capability into their offerings. Running on their cloud environment is even better. Others could sell solutions or be co-sellers, particularly those with sales teams focused on customer engagement or learning and development. Our goal is to explore a full spectrum of partners. The ones that interest us most align with IaaS, PaaS, and SaaS offerings, either as embedded solutions or through a co-sell and resale agreement. We're optimistic about upcoming announcements in this space.

Thanks, and congrats again, guys, on the IPO. Ron, maybe I’d like to talk about the upsell opportunity. You mentioned that half of your customers are buying three or more offerings. Would you be able to highlight the three most popular offerings right now? How do you see this shifting in the next couple of years?

Historically, I’d say our primary products were core platform solutions, media content management capabilities, coupled with our video portal and learning platform or LMS integration. Excluding TV solutions for the moment, these formed our baseline. More recently, on the enterprise side, we’re seeing significant traction with our webcasting solutions, virtual events, and initial use of our virtual classroom. The interesting part is that these offerings often come together, whereby a request might include a webcasting service alongside a video portal or a virtual classroom integrating with LMS systems—showing that these offerings don’t replace but rather amplify each other.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I’ll turn the floor back to Mr. Yekutiel for any final comments.

Yes. I just want to thank you again, everybody, for your time and attention. I know it’s a busy period. You’ve made a lot of time to stay with us. We’ll be happy to provide you with further information if and when you are in touch with us. I wish you a great day and the remainder of the week. Talk to you soon. Take care.

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.