Kaltura Inc Q1 FY2023 Earnings Call

Good morning, everyone, and welcome to the Kaltura First Quarter 2023 Earnings Call. All material contained in the webcast is the sole property and copyright of Kaltura, with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

Thank you, and good morning. With me today from Kaltura are Ron Yekutiel, Co-Founder, Chairman and Chief Executive Officer; and Yaron Garmazi, Chief Financial Officer. Ron will begin with a summary of the results for the first quarter ended March 31, 2023, and provide a business update. Yaron will then review in greater detail the financial results for the first quarter of 2023, followed by the company's outlook for the second 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 March 31, 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. For a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP metric, please refer to our earnings release, which is available on our website at www.investors.kaltura.com. Now, I would like to turn the call over to Ron.

Thank you, Erica, and thanks to everyone for joining us on the call this morning. Today we reported total revenue for the first quarter of 2023 of $43.3 million, up 4% year-over-year and subscription revenue of $40.4 million, up 9% year-over-year. Adjusted EBITDA for the quarter was negative $2.7 million. This quarter we posted record subscription revenue and our year-over-year total and subscription revenue growth rates were the highest since the first quarter of 2021. Subscription revenue represented a record 93% of total revenue, up from 89% in quarter one 2022, as our revenues from professional services continue to decrease due to our increased productization and evolution towards low-touch products. We're also encouraged to see our net dollar retention improve as predicted. While we do not provide a formal forecast for this KPI and it may still fluctuate, we believe it will continue to do better than what it was in the second half of last year. We continue to focus on our plan to return to profitable growth and achieve the lowest adjusted EBITDA loss of the last six quarters. Once again, we reaffirm our goal of achieving a single-digit adjusted EBITDA dollar loss in 2023 and a positive adjusted EBITDA in 2024. Regarding cash flow, we materially reduced our cash consumption from operations in this quarter to $7.4 million compared with $19.6 million in quarter one 2022. As we discussed in our last call, we believe the majority of our expected cash consumption from operations for the year occurred in the first quarter due to typical seasonality and the partial impact of our January budget cuts. We expect a significant improvement in our cash flow in the next three quarters and to achieve cash flow from operations breakeven during 2024 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 the goal of getting there again soon independent of our top-line growth. Moving on to business updates. We continue to benefit from the secular trends shifting business processes from physical to online and personal interactions from in-person to remote. This is leading to the full digital transformation of companies and industries with video increasingly playing mission-critical roles. This new world with video at its center requires new engagement models with customers and new skill sets for employees. For example, this quarter one of the largest banks in the U.S. launched a remote wealth advisory service based on Kaltura’s platform. We empowered the bank's financial consultants to connect in a more meaningful digital way with their prospects and customers, enabling them to improve their reach and effectiveness by easily producing, approving and sharing videos and incorporating them into events and seminars. We also continued to see new and existing customers consolidate around Kaltura’s single flexible platform that uniquely caters to all video needs, including internal and external use cases and all types of video delivery, on-demand, live, and real-time. Many companies use different platforms and vendors to power, for example, their video content management and portals, internal events, training, and town halls, and external events and webinars. A recent Forrester webinar stated that 60% of organizations are even using multiple providers to just power their events, some with as many as seven different providers. Companies increasingly appreciate the great value in consolidating around a single vendor. This reduces unnecessary complexities, streamlines workflows, eliminates content silos, and is far more economical and therefore especially appealing in today's challenging financial environment. While the first quarter is typically our softest for new ARR bookings and we expect this year to be no different, bookings grew compared to the same quarter last year, despite having fewer salespeople carrying quotas. This translates to a meaningful sales productivity improvement. This also marks our second consecutive quarter with higher new bookings compared to a year ago, following five earlier quarters of year-over-year new ARR booking declines. The biggest contributor to new business this quarter continued to be the enterprise segment, in which half of our new ARR bookings came from new customers, which is more than recent quarters. The increase was not just in new customers, but also in our average deal size, mostly thanks to the broadening of our product portfolio in both our E&T and M&T segments. To that end, this quarter we closed five seven-digit contracts with insurance, banking, tech, and media companies, four of them being new customers. Our sales pipeline for the rest of the year is growing with great opportunities across all sectors. We see leading indicators of support and expected continued growth in new bookings, including growth in the number of sales meetings set by our SDRs and in the number of our RFP submissions compared to the numbers in the second half of 2022. We're also boosting our marketing activities this June with the relaunch of our physical industry event for the first time since 2020 pre-COVID. This time, we decided to get closer than ever to the market with a series of five events that will take place in New York, San Francisco, Atlanta, London, and Berlin. At Kaltura Connect on the Road 2023, we will discuss how to achieve greater engagement, improve learning, training and collaboration, and increase leads adoption and retention with fewer resources using advanced video experiences. Attendees, including marketing, training, learning, IT professionals and event technologists will hear from top industry speakers and participate in workshops geared towards creating action plans for increasing return on investment through meaningful engaging digital interactions. Lastly, on the product development front, during the first quarter we continued to evolve our events platform, our webinars products, and our APIs and developer tools. We introduced a set of advanced capabilities that make complex events easier to launch and operate, further reducing the need for services. These include single sign-on templates, custom metadata support, and automated certification workflows for continued professional education. We also expanded usage and session analytics and enhanced our integrations with marketing automation systems. We also launched several capabilities that increase the benefit of consolidating our end-to-end to power all video types and needs, on-demand, live, and real-time video types for internal and external needs. For example, we launched the ability to aggregate user data across all Kaltura products, including events, webinars, and video portals, which now enables customers to collect, present and gather user profile and insights across all products to further increase personalization, interactivity, engagement, and return on investment. Whereas another example, we launched a new showcase page where all customer events and webinars, past and upcoming, are visible. This allows customers to share their full event schedule and consolidate all their event content in a single easy-to-find location that can be embedded anywhere. On the media and telecom front, we continue to enhance and expand the footprint of our front-end TV application for over-the-top setup boxes, Smart TVs, and connected devices which launched commercially for the first time last quarter and is now already live with four TV operators. By adding a set of front-end experience applications to our back-end platform, we're now able to provide an end-to-end TV offering for our media and telecom customers. This increases our average deal size, strengthens our competitive positioning and stickiness, and also enables future introduction of additional revenue streams from user insights and advertising. In summary, the results of the first quarter allow us to remain cautiously optimistic about the rest of 2023. While some of the industry headwinds that we experienced in 2022 are still present and we see customers continue to tighten budgets and delay purchases, we are encouraged to see early indicators of improved market demands, translating to a year-over-year growth in Salesforce productivity and new bookings. Our expanding product portfolio is encouraging companies to consolidate around Kaltura, especially in the current financial climate, which has resulted in an increase in our average deal size. We've made progress towards improving our adjusted EBITDA and cash flows from operations in the first quarter and remain committed to the goal of returning to profitable growth. As I mentioned, we believe that most of the cash flow from operations burn for the year is already behind us and we are reaffirming our forecast for a single-digit adjusted EBITDA loss this year, aiming to achieve a positive adjusted EBITDA and cash flow from operations breakeven in 2024. 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 first quarter 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.investors.kaltura.com. Total revenue for the first quarter ended March 31, 2023, was $43.3 million, up 4% year-over-year. Subscription revenue was $40.4 million, up 9% year-over-year, while professional services revenue contributed $2.9 million, down 39% year-over-year. The remaining performance obligations were $167.4 million, down 2% year-over-year, of which we expect to recognize 58% as revenue over the next 12 months. Annualized recurring revenue was $159.6 million, up 8% year-over-year. Our net dollar retention rate was 102% in the first quarter, the highest since Q1, 2022. Within our EE&T segment, total revenue for the first quarter was $31.3 million, up 5% year-over-year. Subscription revenue was $29.9 million, up 8% year-over-year, while professional services revenue contributed $1.5 million, down 31% year-over-year. Within our M&T segment, total revenue for the first quarter was $11.9 million, flat year-over-year. Subscription revenue was $10.5 million, up 12% year-over-year, while professional services revenue contributed $1.4 million, down 45% year-over-year. GAAP gross profit for the quarter was $27.3 million, representing a gross margin of 63%, the same gross margin as in Q1, 2022. Within our EE&T segment, gross profit for the first quarter was $22.8 million, representing a gross margin of 73%, up from 70% gross margin in Q1, 2022. Within our M&T segment, gross profit for the first quarter was $4.5 million, representing a gross margin of 38%, down from 46% gross margin in Q1, 2022. GAAP net loss in the quarter was $12.8 million or $0.09 per diluted share. Adjusted EBITDA for the quarter was a negative $2.7 million, improving from a negative $8.4 million in Q1 2022. Turning to the balance sheet and cash flow, we ended the quarter with $77 million in cash and marketable securities. Net cash used in operating activities was $7.4 million in the quarter, compared to $19.6 million in Q1, 2022. I would like now to turn to our outlook for the second quarter of 2023 and for the fiscal year ending December 31, 2023. In the second quarter, we expect subscription revenue to grow by 5% to 7% to between $39.9 million and $40.6 million, and total revenue to increase by 2% to 4%, to between $42.8 million and $43.7 million. We expect a negative adjusted EBITDA between $1.5 million and $2.5 million. For the full year, we expect subscription revenue to grow by 4% to 6% to between $158.6 million and $161.7 million, and total revenue to grow by 0% to 2%, to between $168.8 million and $172.2 million. We expect the full year negative adjusted EBITDA to be between $5 million and $8 million. In summary, though we are still encountering industry headwinds, we met our internal expectations of bookings, retention, revenue, profitability, and cash flow for this quarter. In light of the early indicators of improved market demand that Ron spoke about, I am cautiously optimistic about the rest of 2023. We expect revenue from professional services to continue to decrease and subscription revenue to continue to grow faster than our total revenue. Notwithstanding our top-line growth, we remain firmly committed to our goal of returning to profitability. This means meeting this year's single-digit negative adjusted EBITDA forecast and positive adjusted EBITDA next year. As for cash burn, we believe that most of this year's cash flow from operation losses are already behind us, and we plan also to achieve a cash flow from operations break-even during 2024 with sufficient cash reserves.

Thank you. Your first question comes from Gabriela Borges with Goldman Sachs. Please go ahead.

Good morning, guys. This is Jake Titleman on for Gabriela. Thanks for taking our questions. I just wanted to ask about the improvements that you're seeing in sales productivity. Do you think that's a function of the market environment getting better, or are there specific actions that you've taken internally to improve that productivity?

Hey Jake! Thanks for the question, and hello to everybody today on the line. We think it's an improvement in both areas, but let me give you some more color on where things stand by way of booking behavior. We've noted that it was higher than the first quarter of last year, and it's the second quarter of year-over-year booking increase, and that's after five earlier quarters of year-over-year decline. Most bookings were, as usual, from the enterprise side. More bookings this quarter came from new logos as opposed to in the past, so the ratio in enterprise is now back to about 50/50, which is good. Average deal size continues to go up. The geography split channels, booking from services hasn't changed much. It's mainly North America, with about 10% from channels and services declining, but the rest from a marketing-type funnel indicator, as we said, there are more visitors to our website compared to a year ago. We have more meetings set by our SDRs. We have more RFP submissions, notably the second half of last year, and we also have a higher win rate percentage. It is actually higher than all of last year's quarters on the win rate, and so we're trying to figure out what's changing. Well, the tailwinds are still the same, shifting work streams online, but now it's even more because people want to save money by reducing travel costs. We did speak about the fact that they could cut vendors and consolidate around Kaltura. That's really exciting, and the new products we've brought to the market around events have complemented the internal products that we've had, which is great. We’re seeing more events in use by other types of companies than before that was predominantly tech; it's now across all industries. In media and telecom, we have also recently added the front end, which is also increasing ARPU. We noted that we still see the headwinds. There's still the macroeconomic situation. Customers are still reducing budgets. We still have incumbent vendors lowering prices, but when you factor in all the other elements, including all the new trends around rebooking, we think it's just the combination of market dynamics along with our product improvements that are making a difference. And lastly, we mentioned we have five seven-digit deals. It's one large media services deal and a past platform as a service with a very large, well-known new logo tech company that consolidated multiple vendors on Kaltura. We closed three enterprise SaaS deals for both internal live streaming and webcasting and external virtual and hybrid marketing events with Fortune 50 companies, banks, and insurance companies, and these are new logos. We continue to see growth, particularly around media and telecom. This media company is also leveraging our front end, so I think our product strategy is affecting our pipeline positively.

Yeah, that's a great answer. I just wanted to pick up on one of the things you mentioned regarding higher win rates. I know in the past couple of quarters we had talked about pricing pressure from some of the lower-cost competitors. What do you think is driving those higher win rates, and could you discuss the competitive environment overall?

Yeah, that's a good question. So first of all, the new logo win rate was notably higher than any of the earlier quarters. It had come down a bit. I think that maybe the situation is that people want more, because we're seeing a lot more consolidation deals, and the value of that, the virtue of that has increased, that's number one. Number two, hopefully and potentially as markets do a little bit better, people come out of the shell shock of the second half of last year. Having a premium product like Kaltura is worthwhile regardless of the exact price, whether it's at a higher or even the same level. We did mention that existing incumbent vendors are reducing prices in some cases. Maybe now they are saying, you know what, in the second half of last year, it was enough to delay decisions or have them go their way, but now that we're back to breathing normally, people are willing to choose Kaltura, which offers better products and more opportunities for consolidation. So I believe that's the best reason. The other aspect to note is the impact of our new products that we had launched around our event platform; those continue to strengthen further and complement our existing offerings, and possibly our offering is becoming much more compelling in the competitive landscape as customers are looking for consolidated solutions.

Great. Thank you very much.

Appreciate it, Jake.

Your next question comes from Matt Niknam with Deutsche Bank. Please go ahead.

Hey guys! Thank you for taking the questions. Just if I could, first on ARR, I was wondering why it was relatively flat sequentially despite some of the larger deals you referenced. I'm wondering if there are larger deals that were booked that maybe haven't yet been implemented or started billing. And then maybe on a related note, if you can talk about the linearity of new bookings in the quarter, particularly given some of the macro choppiness in March and the restructuring that took place earlier in the quarter. Thanks.

Yeah, let me take this one. Regarding the ARR, it's just a matter of timing of revenue recognition. There is a delay from the time that we see momentum picking up, as Ron mentioned, until the time that we fully book it and then we recognize revenue. So if this trend continues for the rest of the year, definitely we should see some pickup in the ARR numbers. So that addresses probably your question, but what was the second part? I missed it.

Just around the cadence of the booking, so was there any drop-off in March? We saw a lot of headlines around the financial industry possibly taking a little bit longer to make decisions. So I'm just wondering if, between that and the restructuring you had earlier in the quarter, did you see perhaps any slower bookings activity in March or any push-outs from March into April, given longer sales cycles?

No. The general comment we made before is that sales cycles are longer, which still applies, but to tell you that we saw some decline in the second part of the year or going into the beginning of this quarter, the answer is no, we didn’t see any significant change in the trend.

I want to add to the first question about ARR, just so we're all on the same page. The way we've always looked at ARR is not CRR. It's not committed or contracted ARR, but it's a different number. We simply take the subscription revenue and make some adjustments for ASC 606, so it's a refined subscription revenue KPI. The reason we didn't want to – from the IPO on, we've avoided adding contracts that were signed, even if they are signed to the ARR, because some of our deals take longer to implement, especially in media and otherwise. We don't want to inflate an ARR/CRR number that might take several quarters, maybe even longer to launch, as that could be confusing. Therefore, the fact that we closed deals throughout the quarter, if they are not recognized as revenue throughout the quarter, they don't contribute to ARR anyway, and so you wouldn't see that. That's number one. Secondly, let's remember that Q1 is typically a softer quarter than most, as we've consistently stated. We have good deals that are going well; it's going somewhat better than we planned. Things are moving in the right direction, but it's not transformative. We're being thoughtful about the rest of the year, so that's that. Lastly, I want to comment on EE&T versus M&T trends regarding ARR growth, etc. You can look at the subscription revenue within EE&T this quarter that grew, whereas last time M&T actually grew. We encounter variability there quite often. Sometimes sizable projects happen at different intervals, affecting trends, particularly in terms of recurring revenue. I would highlight that within this quarter, we’re seeing a revival of EE&T, as there was sequential growth in subscriptions and non-recurring revenue compared to last quarter, which is not what occurred in M&T. Meanwhile, M&T was a bit softer for this quarter; we expect that to continue to shift positively throughout the year as conditions change. On the specific question regarding March, however, no, nothing adverse happened in March compared to earlier in the quarter. Bookings for the quarter closed adequately, and as we've said, we’re already factoring in anticipated slowdowns, but overall, we’re still witnessing better productivity than before.

That's great. Thank you both.

Thank you, Matt.

Your next question comes from George Iwanyc with Oppenheimer. Please go ahead.

Thank you for taking my question. Maybe digging into the success you're seeing on the consolidation front, Ron, can you give us some perspective on the type of traction you're seeing from the low-touch effort with the sales productivity gains?

Yeah, again, we’ve always stated that the low-touch and no-touch approaches are just starting now, so we haven't included numerous forecasts for ourselves yet. We have very low numbers for 2023, and that all serves as upside, which should significantly improve our trajectories in 2024. We’ve initiated hiring a few people for the low-touch sales, and they are working, contributing, and selling, but it's currently a small team, especially given all the cuts and adjustments until we acquire a solid understanding of the product market fit. On the no-touch side, this is primarily around our new webinars product, launched in Q4. Recently, we initiated a substantial marketing campaign for our webinars. It just launched a couple of days ago, and it's featured heavily on our website with an eye-catching video promoting the free trial for the product. We think it’s a great product, and it has the potential to make a difference; however, in terms of numerical impact, for Q1 and the majority of 2023, it's not a short-term accelerator; it’s more of a mid-term accelerator expected to show results in 2024 and beyond. But we remain committed to this approach. Our analysis hasn’t provided any reason to believe otherwise; it's just that we’re not anticipating immediate revenue contributions.

And maybe you can spend some time digging into the new customer success that you're seeing at the moment. Are you landing in any different ways, smaller or bigger? Perhaps some comments on where you are landing by use case as well.

It's a combination. It's not very different or recent in the sense that we have a wide array of industries. I previously mentioned some of our big deals. There's a very large tech one, plus one in insurance, another in healthcare, and one in Cloud TV, as well as additional opportunities in education. Regarding our recent six-digit contracts, we secured a significant deal with the defense industry that includes web manufacturing. Our current pipeline is quite broad, including significant opportunities in Europe with one of the largest software companies, a major European bank, an Indian IT services firm, a U.S. retailer, and another healthcare provider, resulting in a diverse range of potential contract sizes. Also, as we mentioned, our average deal size has been on the rise. The main reason for this is that customers increasingly opt for combined offerings that cater to both internal and external needs. For instance, we noted previously that half of our customers use 3-plus products, which has always been a strength for the company as we offer a unified, powerful horizontal platform that caters specifically to various use cases and products. Over the years, since our IPO, we recognized that adding external use cases and expanding our product line would naturally boost our ARPU, and we are just starting to observe the evidence supporting that; it results in bigger deals, particularly in financial services where some have scaled up 3x to 5x compared to their initial entry point. We expect to see more of this trend as our product offerings mature.

Can you say it again?

Sure. Just from a pace of investment this year, are you comfortable with the spending level you’re at right now? Additionally, could you elaborate on the seasonal aspects that you mentioned?

Yeah, so first of all, regarding the investment and the expense base that we have right now, we've completed the cost reduction exercise earlier this year, much of which started impacting Q1, and will continue to yield benefits into Q2. The trend in our bottom line will show improvement for the rest of the year. The main aspect of seasonality stems from our cash flow situation, where the majority of our cash burn for this year, as previously mentioned, has already taken place in Q1. The $7.4 million cash flow from operations represents a significant portion of our yearly spend. As we enter the second half of the year, we’ll transition into a significantly improved scenario. We noticed a similar trend last year, beginning with a $20 million burn in Q1 and reducing that to $7.4 million this year; expect a turnaround completely in the latter half.

I would just restate that things are going according to plan, and there are no surprises for us. Adjusted EBITDA was where we thought it would be, and as we look at the rest of the year, it’s still aligned with our expectations. We’re being very careful about guidance for the year, considering it is the first quarter and a particularly turbulent period for the industry and global markets, so we’re proceeding cautiously. Our confidence level is rising as we’ve completed the first quarter. We only experienced a partial impact from our January cuts this quarter and will see more of that impact in subsequent quarters, strengthening our outlook for the remainder of the year. Consistent with our historical performance, we’ve always met our numbers on the bottom line, both adjusted EBITDA and cash flow. To remind everyone, we achieved profitability in both cash flow operations and adjusted EBITDA in 2019 and 2020, and we remain committed to delivering strong results.

The break-even situation that we mentioned in terms of adjusted EBITDA for next year still holds. We intend to achieve cash flow positivity from operations during the upcoming year with ample cash reserves.

Thank you again.

Your next question comes from Michael Turrin with Wells Fargo. Please go ahead.

Hey guys. This is Austin Williams on for Michael Turrin. It looks like the net dollar retention was up pretty meaningfully over the last quarter. I was just wondering if there's any outlier deal helping to drive the bigger uptick and expansions here, and if there's any change in what you're seeing on the gross retention side that you could add as well.

Yeah, it's a good question. Thank you for the inquiry. Last quarter, when we noted that the net dollar retention was at 96% for the second quarter in a row, we indicated all along that this was an intermediate situation with expectations for improvement. We anticipated that it would likely exceed 100% or hover around that mark. And yes, it achieved 102%. To answer your specific question, there is no outlier. No particular deal or customer has significantly influenced the number upward. Therefore, when we look ahead for the rest of the year, we see better figures than what we witnessed in the second half of last year, maintaining at around 96%, and we do believe it will stay above the 100 mark for the rest of this year. Regarding gross retention, as mentioned last quarter in Q4, we recorded a very strong quarter, marking a record in retention rates. It was slightly diminished this quarter but remains robust and not substantially different from previous figures. Therefore, to summarize, we don’t see any significant changes or trends threatening our gross retention rate, and that uplift in net dollar retention is primarily driven by securing additional new business from existing customers rather than gross retention factors.

Okay, got it. I also wanted to ask about generative AI and just how you see that trend evolving. Do you see that as an opportunity, and what are you doing on the product side to potentially integrate this functionality if anything?

Yeah, that's a great question. Generative AI is a very interesting and crucial advancement for our industry. In general, AI is a significant disruptor and will prompt numerous changes moving forward. Yes, we're considering it very seriously. The value of Kaltura as a platform that spans horizontally and integrates deeply into workflows enables us to leverage AI effectively compared to many others because we offer a clear ROI, using video as a means to an end, rather than just video for video’s sake. It’s video for learning, marketing, sales, events, and increasing leads. We will be discussing a lot of this in the upcoming Kaltura Connect conferences. Until now, our BI has been robust, along with good analytics. This quarter, we also announced that we've linked analytics across all our products so that insights can be gathered around individual users in different applications. It's poised for the next step to evolve from BI into AI, and we are considering various strategies to accomplish this. Realistically, had the previous couple of years been stronger, we would have already advanced this and would have been further along the path toward AI integration, as it has been on our to-do list as a significant focus area. We are monitoring progress and allocating budgets accordingly for this initiative. Nevertheless, it’s of paramount importance for us. Our goal is to automatically generate targeted content for specific users and contexts, enhancing the feedback loop with user behaviors. We see ourselves as a leading distribution platform, creating the potential to become a content creation platform, handling the entire lifecycle of video from creation to consumption through enhancing targeting, supported by both AI and BI.

Your next question comes from DJ Hynes with Canaccord. Please go ahead.

Hey! Good morning, guys. Ron, I have two questions regarding the M&T business. The first, with subscription revenue up and services revenue down, I would have expected to see a favorable impact on gross margins. Could you touch on what's happening there? And second, regarding what you discussed this morning about adding a front end, I think you alluded to potential incremental revenue opportunities centered around consumer data mining, possibly advertising over time. How are you envisioning that business evolving?

Yeah, that's a great question. Thanks, DJ. First, regarding M&T. M&T has always had some fluctuations due to larger deals, and professional services often drive the numbers, making it somewhat clunky. In this quarter, for example, PS significantly decreased compared to Q4, but Q4 also saw an anomaly where it had increased. Overall, there wasn’t a substantial change in subscription performance in M&T; it doesn't grow every quarter, as some of these clients may re-up with user count assessments on a half-year basis or via larger contracts affecting our revenue trends. Nonetheless, the business trajectory remains upward; this quarter, we launched multiple projects in new territories. We have gone live with another operator in Eastern Europe, which is aligned with our front end. Therefore, while we can expect some fluctuations, both subscription revenue and professional services are anticipated to perform similarly to EE&T for the year. The year-over-year growth rate in subscriptions is expected to match the decline rate in professional services proportionately. Adding both together, given M&T typically has higher professional services, this might indicate that overall M&T will likely experience a slower growth path, as the impact from lowering PS will weigh more heavily there. However, both segments are performing favorably and should grow well. Regarding the front-end enhancements, our offering has been anticipated for some time. The advantage lies in controlling the end user, allowing us to delve deeper into analytics, targeting, recommendations, and potentially advertising. Historically, our backend platform has been a leader, and with our newly launched front-end, we can now serve comprehensive solutions for analytics and advertising, aiming to enhance user targeting and content delivery. We certainly recognize that optimizing users’ experiences is vital. Currently, TV’s advertising model is not programmatic in the same way as online video or general online advertising. If we can deliver the right offer, targeting the right user at the right time in the right context, then CPMs can increase significantly. Additionally, it’s anticipated that inventory for advertising-based online TV (AVOD) will surpass subscription and transactional models (SVOD and TVOD). We see this as a steady progression for us that we intend to pursue. However, we also have to reflect this transformation over time, as the previous couple of years have forced us to be more strategic than we initially planned, and while progress may not happen in immediate quarters, we are focused on this business shift and are confident that it will play a valuable role in our future growth.

Yeah, helpful comment. Thank you.

Your next question comes from Tom Blakey with KeyBanc Capital Markets. Please go ahead.

Hello, everyone! Thanks for taking my question, guys. My first question is on integrations. I know you talked about going upstream and selling to CMOs in prior quarters, securing several larger deals while spending constraints are prevalent across the companies we’re analyzing here. I just wanted to see if there has been any change in the integration with Kaltura and organizational systems. That would be my first question. Considering your insights in the past and what you see in these recent deals in the pipeline.

Yep. So the answer is, one of Kaltura’s biggest na advantage is our highly flexible, API-driven platform. Every software has APIs, but most aren't built with APIs in mind. We were first PaaS then SaaS, and the whole idea revolves around this Lego concept, where we designed everything sufficiently straightforwardly so we can rapidly add a multitude of integrations and tightly align it into various workflows. Similarly, as we've ventured into the CMO use cases, there are a few highlights. Firstly, there's integration with everything else in the organization, which connects to internal use cases wherein the same content can transition from internal to external use. Second, our integration involves VOD live and real-time capabilities harmoniously working together. Thirdly, we enjoy a partnership ecosystem consisting of about 120 plus companies already. Over the last few quarters, we have started integrating with more modern technology. We’ve achieved three or four integrations recently and anticipate adding around a dozen more over the next year, so this is being pursued aggressively. We are unique in that regard. If you observe the various players targeting CMOs, most do not address internal, CIO, HR, L&D needs. It’s not merely about cost savings; it’s delivering an end-to-end solution addressing all requisite use cases, both internal and external, which we can uniquely provide.

Sounds like solid trends for net retention there. My second question is for both you and Yaron regarding visibility. I noted earlier comments concerning your contracted ARR versus the traditional interpretation of ARR. With the increase in deal size that both of you highlighted, I’d like to understand what you perceive as the key gating factors around guidance and visibility here as we progress into the second half of ’23 considering these deals. That would be helpful. Thank you.

I want to clarify that while you referred to our method as unconventional, it’s vital to note that we're conservative. It’s a more cautious approach, focused on realistic expectations rather than inflating the numbers simply because we secured significant deals. Historically, we’ve emphasized maintaining authentic metrics. If those numbers improve down the line, we will report them. We clearly have a solid indication of what’s ahead—our guidance remains steadfast. We are still facing industry turbulence, but we don’t want to overstate expectations. Additionally, while we achieved strong Q1 results, we’re still keeping cautious about predictions for the full year as there are variances. We are confident in our established historical performance, and we do anticipate achieving the benchmarks we’ve communicated.

Reflecting on the guidance we provided, we exceeded our prior expectations for Q1, and we’ve set a solid outlook for Q2. Simultaneously, we’re being prudent in our approach towards guidance for the rest of the year regarding top-line projections, not due to a lack of clarity, but simply because we are mindful of broader conditions around us. We aim to deliver and continually exceed expectations without over-promoting numbers that may be stretched. Thus far, we are seeing positive developments from the trends Ron discussed earlier, which instills confidence as we approach the remaining quarters. Our bottom line guidance remains consistent with improvements reflected therein as we’ve undertaken actions crucial for optimizing our performance. Historically, we have always achieved positive outcomes; we have the experience of doing so in profitable conditions while still maintaining solid growth.

I want to reiterate; Q1 has traditionally been softer relative to other quarters in our history. So while we performed well, it does not dramatically change how we perceive the future landscape. Being in the early part of the year, especially in this unpredictable environment, we need to remain patient as we assist operational success. Just keep in mind that no material surprises arose from this quarter's results, and we are still optimistic about our trajectory.

Understood. Clear and helpful—thank you, gentlemen.

Thank you.

There are no further questions at this time. Please proceed.

Okay. It sounds like we’re wrapping up. I wish to thank you all for the insightful questions today. I hope everyone is doing well. As I mentioned earlier, the broader industry tailwinds and headwinds are evident, but from our company perspective, we feel we have greater visibility and confidence in the figures we’ve outlined for the year ahead. We’re looking forward to progress in all areas of growth we’ve outlined today. Thank you again. Have a great day. Bye-bye.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.