Kaltura Inc Q2 FY2025 Earnings Call

Good morning, everyone, and welcome to the Kaltura Second Quarter 2025 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, Erica.

Thank you, operator, and good morning. I'm joined by Ron Yekutiel, Kaltura's Co-Founder, Chairman, President, and Chief Executive Officer; and John Doherty, Chief Financial Officer. Ron will begin with a summary of the results for the second quarter ended June 30, 2025, and provide a business update. John will then review the financial results for the second quarter of 2025 in greater detail, followed by the company's outlook for the third quarter and full year 2025. 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 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, 2024, and other SEC filings, including the quarterly report on Form 10-Q for the quarter ended June 30, 2025, to be filed with the SEC. Any forward-looking statements made during 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 non-GAAP financial measures, adjusted EBITDA, non-GAAP net loss, and non-GAAP gross margin during this call. For a reconciliation of these measures 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'd 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 of $44.5 million for the second quarter of 2025, up 1% year-over-year and subscription revenue of $42.4 million, up 3% year-over-year. Our ARR and RPO grew by 3% and 6% year-over-year, respectively. Our year-over-year revenue growth this quarter was fueled by EE&T and curtailed as expected by M&T due to the delayed M&T churn for 2024, as discussed in the last two earnings calls. Consequently, while EE&T total revenue grew in the second quarter by 7% year-over-year, its highest growth rate since the first quarter of 2022, M&T total revenue declined in the second quarter by 14% year-over-year, its sharpest decline ever. With that said, as we look ahead, we expect to post sequential growth in M&T revenue in the fourth quarter, fueled by an expected improvement in M&T gross retention and also an increase in new bookings, as also discussed in previous earnings calls. The recently announced extension and expansion of our long-term contract with Vodafone, a global telecom leader and our largest customer throughout the last decade, supports that and highlights our continued leadership in the cloud TV market. In the second quarter, we posted a record non-GAAP net profit of $2.5 million. Adjusted EBITDA was $4.1 million, consistent with our record first quarter and represented our eighth consecutive quarter of adjusted EBITDA profitability. This was driven by a strong non-GAAP gross margin of 70%, up from 66% in the same quarter last year. Cash flow from operations was $2.7 million, the highest second quarter result since 2020. Moving on to the business update. New subscription bookings in the second quarter grew sequentially and comprised 21 six-digit deals, including with technology providers such as AWS and Xbox, which we can name, as well as an employee experience platform provider and a leading financial services platform provider. Our six-digit deals also included two of the largest U.S. banks, a top pharmaceutical company, a leading medical organization, one of the largest automakers, one of the leading global professional services firms, and several educational institutions and media and telecommunications companies. Customers continue to consolidate around Kaltura, and our average ARR per customer once again reached a record high. I am pleased to update that in the second quarter, we closed our first three AI deals, which included sales of our exciting new offerings, Content Lab and Genie. Over the last few quarters, we progressed rapidly from initial product vision to development, proofs of concepts, data releases, and full commercialization. Use cases included the automation of manual workflows for video creation, enrichment, delivery, and measurement, as well as providing end users with interactive, hyper-personalized video-first onboarding and upskilling experiences. Among the first customers is a leading professional services and consulting powerhouse with over 750,000 employees worldwide. We expect many more and bigger deals to follow in the quarters ahead as our growing sales pipeline already includes over 100 additional qualified opportunities with companies from all our target industries, including technology companies, regulated industries, including banking, insurance, health care, and pharma, education institutions, and media and telecom companies. I'll discuss the AI opportunity further in my upcoming product update. On the gross retention front, as noted, we anticipated a lower rate of retention in the first and second quarters of the year due to delayed media and telecom trends from last year. That said, our gross retention rate in EE&T continued to be very strong in the second quarter, reaching again its best level since the fourth quarter of 2022. We continue to forecast an annual EE&T gross retention rate in 2025 that is better than that of the previous four years and for M&T gross retention rate to improve in the fourth quarter, as stated earlier. We were also pleased that despite the strong temporary media and telecom headwinds, our net dollar retention in the second quarter was above 100% for the fourth quarter in a row. Moving on to the product front. Let's begin with our continued and growing investment in our AI offerings. In the second quarter, we enhanced our Content Lab agent to support multilingual video metadata, summaries, and quizzes, making video more accessible, discoverable, and impactful across a diverse user base globally. We also integrated Content Lab natively into our virtual event offering designed to help event organizers generate clips and video summaries, repurpose content, boost discoverability, and increase engagement. As for our family of Genie agents, we enabled them to pull insights and generate content not only from videos but also from additional data sources such as documents, making their output much richer, contextualized, and personalized. We also enabled them to support anonymous and unauthenticated users, which is intended to broaden their reach and usability to external public websites and portals while maintaining privacy and compliance. Lastly, regarding our homegrown AI-based automatic speech recognition transcription engine, in the second quarter, we launched our live captioning service and seamlessly integrated it into our live video workflows. For our previously released video-on-demand AI-based automated transcription engine, we added support for additional languages in a dictionary feature that allows customers to define custom word substitutions and rules that improve the accuracy and quality of captions, particularly for company-specific language and frequently used terms. As we look forward to our planned AI developments in the second half of the year, we intend to expand Genie to include enhanced response formats beyond flashcards and videos, add conversational memory to increase response quality and enable a more natural flowing dialogue and enable users to utilize Genie directly on any individual videos to extract deeper insights and information and drive deeper engagement. Beyond Genie enhancements, in the second half of this year, our planned roadmap includes a new AI agent for content publishing that would automate related manual processes, including complex repetitive tasks for content and metadata moderation and approval, accessibility, enrichment, repurposing, captioning, and quiz insertion. We believe these updates will help enable content to be published at scale, faster and cheaper, with higher consistency and better compliance. Looking further down the road, beyond the second half of the year, our vision is to transform our AI agents from reactive prompt-based agents into proactive automated ambient agents that will anticipate needs and take actions to optimize impact across the content life cycle of all our use cases, including marketing, sales and customer success, teaching, learning and training, communication and collaboration, and entertainment and monetization. We plan for our agents to not only drive productivity but to become intelligent enough to replicate human roles and automate tasks, acting as AI twins, and to gradually further evolve into AI specialists that are intended to be role-aware, use case-specific, and ultimately also industry-specific as we plan to launch, for example, specific agents that will cater to video-first employee and customer experiences in the financial services, pharma, or education markets. Moving beyond our AI innovation, in the second quarter, we rolled out powerful updates across the Kaltura AI Video Experience Cloud, making video creation, management, and engagement more intelligent, inclusive, and scalable. We enhanced our self-serve event platform to also support multi-track events without requiring professional services from Kaltura and also enable more personalized notifications based on session interest, improving event participation and engagement. We expanded our event APIs, making them easier to integrate with external systems and to manage events at scale efficiently while generating more data and insights. On the video portal front, we've expanded the streaming module to enable more consistent professionally branded experiences and introduced a content tab webpage that increases the discoverability of public content. We also enhanced our LMS and CMS extensions with a modern folder structure that enables users to better manage large volumes of videos. Lastly, regarding our virtual classroom product, we enabled hosts to add audio files to their session storyboard to be used, for example, for narrations, added instructions, and shared music. Our product leadership continued to earn strong industry recognition in the second quarter, with our new Class Genie winning the e-Learning Innovation of the Year Award in the Seventh Annual EdTech Breakthrough Awards and our virtual events and webinars offering sweeping five goals at the 2025 Eventex Awards, earning us top honors in every category we competed in, including Best Event AI Technology, Best New Event Technology, Best Audience Engagement Technology, Best Data Collection and Event Analytics Technology, and Best Virtual Event Platform. In the passing quarter, we were also recognized by IDC as a leader in their first-of-its-kind marketscape research and vendor assessment for AI-enabled enterprise video platforms. The report stated that we were named a leader due to our intelligent automation extensible workflows and advanced analytics and that our full spectrum platform built for both internal and external use cases stands out due to its modular API-first architecture, self-service capabilities, and support for content reuse. It further states that a key factor in our strong positioning was the recent launch of our Agentic AI offerings, including Content Lab and Genie, which are designed to boost productivity and maximize content value. We're honored to be recognized and awarded time and again by so many industry experts and are excited to see the buzz around our new AI products. Moving beyond product, in the passing quarter, we hosted our Kaltura Connect on the Road 2025 events in New York, San Francisco, and London. Hundreds of marketing, communication, and video tech leaders from top organizations came together to discuss how AI-infused video can transform organizational knowledge and employee and customer experiences. Speakers included leaders from leading corporations such as AWS, YouTube, Adobe, Salesforce, IBM, Visa, AstraZeneca, Pinterest, Vanguard, Bloomberg, and many more. You could view recordings of this event on our website. In the second quarter, we also launched our Kaltura Connect in Education 2025 series of events with the first event in the Netherlands. Four additional events have already been held in the third quarter across the U.S., and another two events are planned to be held later this year in Europe and Asia-Pacific. Information about these events is available on our website. Lastly, we announced today that our Board of Directors has approved a reorganization plan that includes, among other things, downsizing approximately 10% of our current workforce. We expect to realize cost savings starting later in the third quarter. The plan is focused on realigning our operations to further increase efficiency and productivity. John will provide details on the expected cost savings, but I want to highlight three high-level points. First, this type of reorganization was anticipated in connection with our stated goal earlier this year of doubling adjusted EBITDA in both 2025 and 2026 and returning to be a Rule of 30 company by 2028 or earlier through a combination of double-digit revenue growth and adjusted EBITDA margin. Second, this organization plan moves us to a unified technology team, which includes all our engineering resources and a unified customer experience and sales team, which caters to all our customers and prospects across both EE&T and M&T. Our plan is to gradually further verticalize both teams into more granular EE&T sub-industries to develop, market, and sell more vertical SaaS AI-infused video solutions, for example, to the financial services, pharma, tech, and education markets. Translating to spending, the budget reduction applies to engineering, professional services, and administration spending items and not to our sales and marketing spend run rate, which is planned to remain at the same level and is gradually expected to grow. And third, factored into our total cost savings are our ongoing automation and modernization efforts through AI-driven productivity improvements across the company, which are already contributing to our efficiency and are expected to grow. In summary, we wrapped up another strong quarter where we surpassed the high end of our subscription revenue, total revenue, and adjusted EBITDA guidance ranges, as well as our expected cash flow from operations. Our new bookings grew sequentially and our sales pipeline indicates higher levels of new bookings in the second half of the year for both EE&T and M&T, coupled with an expected return to a strong M&T gross retention rate in the fourth quarter. We continue to be fueled by customer consolidation around our platform, the maturity of our newer products, and our exciting new GenAI offerings that started to yield revenue in the passing quarter and are expected to yield much more in the quarters ahead. We continue to see momentum building across several parts of the business. And while this gives us confidence in our trajectory, we remain mindful of market uncertainties and continued geopolitical turbulence. Therefore, we are maintaining our previously provided revenue guidance for 2025 with refined ranges for both total revenue and subscription revenue. We are, however, increasing once again our adjusted EBITDA guidance for the year and restating our expectation of stronger cash flow from operations throughout the second half of the year, resulting in an annual level similar to our guided adjusted EBITDA. With that, I'll turn it over to John, our CFO, to discuss our financial results in much more detail.

Thanks, Ron, and I appreciate you all joining the call this morning. Kaltura continued its strong and focused execution in the second quarter with sequential growth in new bookings from existing and new customers, initial sales of our exciting new AI products, continued improvement in operating efficiency, and further reallocation of resources towards higher ROI opportunities and markets. Touching on a few highlights in the quarter that demonstrate this. For the 11th consecutive quarter, total revenue grew year-over-year, driven primarily by strength in our subscription revenue, which has once again grown year-over-year, consistent with all past quarters. Both total ARR and average ARR per customer continued to grow year-over-year with average ARR at a record high, the highest total revenue growth rate in EE&T since the first quarter 2022, as well as the continued strong EE&T gross retention rate, which was at its highest level since the fourth quarter of 2022. Work on the extension and expansion of the Vodafone contract, which we announced earlier in the week, fortifying our M&T segment, a record level of adjusted EBITDA matching the first quarter result and representing the eighth consecutive positive quarter of adjusted EBITDA profitability, highlighting our continued focus on operating expense management and cash flow from operations that was the highest second quarter result since 2020. With that, let me move on to our results. Our results once again exceeded our guidance for both revenue and adjusted EBITDA for the quarter. Total revenue for the quarter ended June 30, 2025, was $44.5 million, up 1% year-over-year and above the high end of our guidance range of $43.4 million to $44.2 million. Subscription revenue was $42.4 million, up 3% year-over-year. This was also above the high end of our guidance range of $40.8 million to $41.6 million. Professional services revenue contributed $2.1 million for the quarter, similar to the first quarter, but down 31% year-over-year, consistent with the expected trends we discussed on previous earnings calls. The remaining performance obligations were $188.1 million, up 2% sequentially and an increase of 6% year-over-year, of which we expect to recognize 61% as revenue over the next 12 months. The strength in RPO is driven by our strong renewals and upsells in the quarter, and we expect this to continue to improve as we move through the year, consistent with past years, as Ron touched on earlier. Annualized recurring revenue was $170.4 million, up 3% year-over-year, driven by our increase in subscription revenue in the quarter. Our net dollar retention rate for the quarter was 101% compared to 107% last quarter and 98% in the same quarter last year. This sequential decrease was anticipated and reflective of the increased churn in M&T in the first half of 2025 due to the delayed churn from 2024, as Ron mentioned earlier. I will now touch on the segments briefly. EE&T segment performance was strong. Total revenue for the second quarter was $33.2 million, an increase of 7% year-over-year. Subscription revenue was $32.6 million, up 9% year-over-year, while professional services revenue contributed $0.7 million, down 44% year-over-year. M&T segment performance was challenged in the quarter due to the churn impacts that we previously discussed. Total revenue for the second quarter was $11.2 million, representing a decline of 14% year-over-year. Subscription revenue was $9.8 million, down 13% year-over-year, while professional services revenue contributed $1.4 million, down 23% year-over-year. We do anticipate M&T's performance to improve in the fourth quarter through increased gross retention and new bookings. To that end, the renewed and extended long-term contract with Vodafone is a strong validation of our market and product leadership in M&T. GAAP gross profit in the second quarter was $31.2 million, up 9% year-over-year. Subscription gross profit was $32.7 million, also up 9% year-over-year. Gross margin was 70%, which is up from 65% in the second quarter of 2024, and subscription gross margin was 77%, which is up from 74% in the second quarter of 2024. Total operating expenses in the quarter were $34 million compared to $37.2 million in the second quarter of 2024, a reduction of 9% year-over-year. Adjusted EBITDA for the quarter was $4.1 million, an increase of $2.5 million from $1.6 million in the second quarter of 2024. This result matched the record that we set in the first quarter and along with our improving expense and margin profile highlights our continued focus on improving our operating efficiency over time. I will discuss this more in a moment. GAAP net loss in the quarter was $7.8 million or $0.05 per diluted share. This is an improvement of $2.3 million year-over-year. Beginning with the passing quarter, non-GAAP net income adjusts for gains or losses from foreign currency translation adjustments in addition to our historical adjustments highlighted in our earnings release. We have decided to begin making an adjustment for FX impact now given we incurred a material FX loss this quarter, primarily due to the depreciation of the U.S. dollar against the Israeli shekel. Given the recent fluctuation of the dollar related to less certainty in the global economic environment, as Ron touched on earlier, we believe that this change will provide a better reflection of our overall operating performance on a non-GAAP net income or loss basis. This results in non-GAAP net income in the quarter of $2.5 million or $0.01 per diluted share, an improvement of $4.5 million year-over-year. Moving to the balance sheet and cash flow. We ended the second quarter with $75.3 million in cash and marketable securities. Net cash generated by operating activities was $2.7 million in the quarter, an increase of $4.3 million year-over-year and, as I mentioned, was the strongest second quarter result since 2020. Lastly, before moving to our updated guidance, we announced this morning a reorganization within Kaltura, as Ron mentioned earlier. This will result in a reduction of approximately 10% of our workforce. We expect to realize cost savings starting later in the third quarter. I want to reinforce that these reductions are not a reflection of market trends and that they will not impact our marketing and sales activities. We still plan to increase marketing and sales investment gradually to support our expected top line growth. We remain very confident in the market opportunity available for Kaltura and have identified areas where we could streamline the business to more effectively target these opportunities and serve our customers. Total savings from workforce reductions associated with the reorganization expected for the balance of 2025 is approximately $2.6 million, which translates to $8.5 million on an annualized basis, strengthening our financial position moving forward. The total one-time charge related to the reorganization is expected to be approximately $0.7 million in the third quarter of 2025. I would now like to turn our outlook for the third quarter of 2025 and for the fiscal year ending December 31, 2025. We are executing well as our solid second quarter performance demonstrates while continuing to manage the uncertain macroeconomic environment and its impact on the general business landscape. We have been effectively addressing M&T churn and expect it to be materially lower in the fourth quarter, enabling a forecasted sequential M&T revenue growth in the fourth quarter. In addition, the pipeline of opportunities for both M&T and EE&T continues to grow, which we expect to drive new bookings in the second half of the year. As a result, we are maintaining our overall revenue guidance for the full year with another increase to our adjusted EBITDA guidance and our expectation of a much stronger cash flow from operations throughout the second half of the year, resulting in an annual level similar to our guided adjusted EBITDA. Let's dive deeper into our guidance going forward. For the third quarter, we expect subscription revenue to range from a decrease of 3% to 1% year-over-year and to be between $40.8 million and $41.6 million and total revenue to range from a decrease of 3% to 2% and to be between $42.8 million and $43.6 million. We expect adjusted EBITDA to be between $1.5 million to $2.5 million. This subscription revenue and adjusted EBITDA guidance is in line with last quarter's guidance as some of the anticipated top-line headwinds rolled from the second quarter to the third. The quarter's total revenue guidance incorporates lower expectations for revenue from professional services, in line with overall trends and last quarter's results. For the full year revenue, we are maintaining the midpoint of guidance while tightening the upper and lower balance of both subscription and total revenue. We expect subscription revenue to grow 2% to 3% over the 2024 fiscal year and to be between $170.9 million and $172.9 million and total revenue to range from an increase of 1% to 2% year-over-year to be between $180.4 million and $182.4 million. For the full year adjusted EBITDA, we are again raising our guidance to be between $14.5 million and $16 million. This represents a tightening of the guidance range while also increasing the top of the range. Our guidance reflects more than a doubling of our adjusted EBITDA profit and margin versus 2024. In summary, the second quarter was better than expected, as the impact of some revenue headwinds were pushed into the third quarter. As we mentioned in the last two earnings calls, we needed to manage through some delayed 2024 churn in M&T in the first half of 2025 and we have. We also expect to continue to see solid performance in EE&T and we have. Going forward, we expect our M&T retention rate to improve in the fourth quarter to its typical strong level and we continue to forecast a strong annual EE&T gross retention rate for 2025 that will be better than that of the previous four years. We also expect both EE&T and M&T new bookings to continue to increase in the balance of the year, driven by momentum in our sales pipeline, which also includes exciting potential AI deals. While we continue to closely and prudently monitor the macroeconomic environment, as I mentioned earlier, we are navigating the currents well and we continue to believe that we will continue to benefit from the emerging tailwinds that we are seeing, including spend consolidation, digital and AI transformations, and the hybrid workplace that is continuing to drive demand for video-based offerings. This is certainly highlighted by our record average ARR this quarter. As we said in the past, and I want to reinforce here, we will continue to target both revenue growth and sustained and improving adjusted EBITDA profitability, consistent with our guidance. Our results continue to demonstrate that we are on the right path to achieving these objectives and to drive consistent returns to our shareholders. We are confident that we remain in a good position to achieve modestly accelerated revenue, adjusted EBITDA profitability, and cash flow from operations growth profile beyond 2025. Our target continues to be to achieve double-digit revenue growth and a Rule of 30 combination between revenue growth and adjusted EBITDA margin by 2028 or sooner. As I've said before, Kaltura has achieved its goal in the past, and we firmly believe that we will achieve it again. With that, we'll open up the call for questions.

And your first question comes from Gabriela Borges with Goldman Sachs.

Ron and John, I wanted to ask you a little bit about your bookings comments for the back half of the year. Talk to us a little bit as a follow-on from the Analyst Day. What do you think is working well in your incremental new bookings momentum? And is there anything that you're learning as you go through the year that is different from your expectations as you started the year?

Thank you, Gabriela, for the good question. I appreciate it. And for those who have not had a chance to listen to our March event for investors, it's available in the Investors section of our website. There are great insights there and also great demos there. I think a few things are shifting gradually and are helping our bookings pick up. Some of them are multi-quarter investments, and some of them even multiyear investments. If I go back to 2020 when we started to add real-time conferencing and expanded from the content management world into also events and webinars, we gradually moved from high services events into more self-serve, low-touch events that are enabling not just the multi-track events but also simpler events and going down market, if you will, by way of the size and complexities of events. They've become much more stable, much more robust, much more successful, and we are now very mature in that offering and taking in a lot more business. That’s one trend that's important, the maturity of our events offering. The second is consolidation that we've often discussed and mentioned. As we've gotten further away from the post-COVID years, companies were able and are able to take a more strategic approach towards their video purchasing and understanding that they don't need to have multiple vendors, and this is reflected in the increase in the average ARR per company, which has been going up and up, hitting a record high. We have some very big deals ahead of us that are showing more of that. The AI component would be the third factor. We’re at the beginning of that but we expect to see a lot more. We have a strong pipeline. We have our initial products and more to follow. It's really the fact that we're now able to marry the creation of content with the distribution of content in real-time so that people can have a hyper-personalized, hyper-contextualized experience that is rich. That's exciting; there’s a lot more that we expect this quarter. So again, we're also adding further verticalization. We can talk more about that. We have had specific efforts in education, media, and telecom, and have treated enterprise relatively horizontally. We expect, especially with AI technology, to offer more verticalized additional efforts that take us deeper and deeper.

Yes, absolutely. That makes sense. And then, John, just on your comments on addressing M&T churn. I know you've been talking about this consistently for some quarters now. Remind us, why do you think churn was elevated? And what are you doing to address it?

Yes. As you mentioned, Gabriela, we've signaled this from the back end of last year that we expected it coming into this year. There is a lot of shifting going on in that space with the move to IP in the cloud. Companies are continuously reevaluating how they want to go to market and also looking to refine how they go to market. We are not unique to this; this is happening across that part of the space. That's why we made sure that we incorporated that into the guidance we provided. That said, we've been working very hard with our major customer, Vodafone, and it was really good to see that we were able to sign this extension and expansion of a contract with them. I think that’s validation that we are well-positioned. That’s why we do expect – while some of this also will impact the quarter, as discussed, we do expect that we're kind of bottoming out and it’s going to be up and to the right from here. The Vodafone contract provides a little bit of extra wind in our sails.

If I could add just a few more words, thank you, John. Some of the churn we see is what we call OVP as opposed to OTT, online video platform as opposed to over-the-top or cloud TV. They are earlier customers that are less 'strategic' because they’re offering the video flow of encoding delivery rather than more of the end-user experience for a full-blown TV grade, which is much stickier and exciting. When we look at the customer mix that we have ahead of us, a significant portion is extremely satisfied, extremely sticky, and is not expected to churn. So some customers are peeling off, but the heart of it has been strengthened, such as Vodafone, which we just extended for another decade. They’re very happy, and there’s a lot of discussions around the expansion of this relationship. We're proud to have replaced much larger companies like Cisco, Ericsson, and TiVo. It's a significant achievement for a company of our size. To remind you, we made these changes knowing the market would recover. While we've slowed in M&T, we’re seeing more interest in this industry. Now that we're profitable and growing, we’re able to regain our sales effort.

Your next question comes from Ryan Koontz with Needham.

Wanted to ask you, Ron, how your new AI products are folded into your selling motion and your pricing? Is it currently an upsell to your current offering primarily on the EE&T side? And when do you think that maybe these AI products could become like a lead engagement tool for some of the sales efforts?

Yes. It is an upsell presently. We are discussing both the Content Lab and the Genies; there are more agents that will come around the corner. They’re being used mostly based on FTE pricing like we have for the other ones, but depending on where and how they're inserted, they’re augmenting and are priced associated with the attached products. In the world of events, it is often based on the number of registrants, attendees, or permitted people to create events. So there could be flexible pricing, but they're definitely additive. However, there are no AI-infused components that might not be additive because they’re just better replacements for existing products. An example could be our video-on-demand transcription engine that is whisper-based, replacing third-party vendors, enabling us to reduce costs while also providing greater quality. The core AI products we've discussed are additive. We expect them to become a bigger part of our discussion down the road as we're becoming more of a video creation tool for people to generate video for customer and employee experiences.

That's great. Maybe a quick follow-up if I could. Are there any particular market verticals in EE&T that you're excited about in the second half of this year that are behaving well for you?

Yes. There is exciting potential in all of them. The main verticals we are breaking out in EE&T are, of course, education, tech, regulated industries that include both financial services and pharma, and to some extent, government. In every one of these environments, we're seeing excitement around the different elements I mentioned earlier: maturity of our events, consolidation efforts, and AI. We're quite excited about all of them, and we plan to go deeper into verticalizing our product, marketing, and sales to offer more capabilities for each one that is unique and distinct.

And your next question comes from D.J. Hynes with Canaccord.

Look, in your answer to Gabriela's question, you guys reiterated you've been very transparent about the M&T churn that would hit in Q2. You told us that NRR would take a step back. But the sequential decline in EE&T revenue caught me a little by surprise this quarter when most of the metrics seemed to be trending in the right direction over the last several quarters. Can you just help me understand what's happening there? Is it seasonality? I know your expectations are positive for the back half of the year, but just help me with the revenue dip here in Q2.

Yes, appreciate it. We actually guided by words to that because we don't provide separate guidance for each. As we mentioned, the first quarter of the year is generally low, and what's leading the second quarter revenue really. If the bookings are low and the churn is reasonable, it just doesn't contribute much. Very importantly, we also had the on-prem revenue in the first quarter and that is almost exclusively EE&T. We said that was a big increment that causes Q2 to go below Q1. This isn’t a reflection of EE&T not doing well; it’s just behavior governing it.

Yes, Ron really touched on it. The strength of the first quarter made for a tough comparison overall.

Yes. Okay. Makes sense. And then, Ron, I’d love to have you talk a little bit about the bookings mix in terms of net new versus into the base and kind of if this quarter looked like previous quarters, kind of what the plan is to catalyze the net new business?

Got it. I appreciate it. Yes, we've been discussing this for a long time. Historically, the company was about 50-50 between new versus upsells – and in recent years, it’s been much more upsells than new logos. This is indicative of the state of the industry because many folks are not jumping on replacing vendors. They've been doubling down on existing vendors. However, we’ve been adding more and more new business. For example, we just mentioned Xbox this past quarter, which is a foray into the world of Microsoft. There are other significant names in our pipeline. We're seeing new logos coming in at a more accelerated rate than in previous years. I think this is partly due to the industry distancing itself further from the changes that happen in COVID and the strength of our products.

Your next question comes from Michael Turrin with Wells Fargo.

This is Ronit asking on behalf of Michael. Could you discuss the reasons behind the 10% reduction? I would appreciate it if you could elaborate on the most impacted areas and how you anticipate it will lead to cost savings in the latter half of this year and into next year.

Appreciate it, Ronit. I'll say some words and pass it over to John. This is a reorganization aimed at enhancing productivity, streamlining operations, and capturing more synergies. It is to the tune of 10% of our total workforce, encompassing both full employees and offshore and full-time outsourcing. We expect to realize cost savings later this quarter and next. It’s mostly engineering, professional services, and administration, not sales and marketing. We've already taken into account AI improvements which have been significant in our engineering world. It’s an opportunity to realign towards our growth commitment. We are committed to achieving revenue and EBITDA growth, and you’ve seen our gross margin increase significantly over the years. It is a move to become a Rule of 30 company again with double-digit growth by 2030 or earlier.

Thanks, Ron. We just announced it this morning. These decisions are never easy, but we felt it was necessary and part of the guidance we provided at the beginning of the year. These changes will take time; folks won't be coming off until sometime in the early September timeframe. We expect benefits to begin materializing starting in September. This year, we expect, as mentioned in the prepared remarks, it will be about $2.6 million for the year. If you annualize that, it's $8.5 million. However, this does not mean applying straight to 2026, as we plan to continue investing in sales and marketing. Our cost savings primarily come from R&D and G&A, not from areas involving growth opportunities. We're still very optimistic about market opportunities.

Great. Just a quick follow-up related to that. Your sequential EBITDA guidance reflects a step down. Is there anything to note in terms of seasonality or risks that layer into profitability metrics?

Yes, we are running a little short on time, but effectively, our adjusted EBITDA has been relatively strong. We did receive some support in Q2 from some one-time items related to a PTO reversal, withholding tax, and bonus reversal. Some of that added strength in Q2 will be reflected in our expectations for Q3. However, we anticipate a very strong fourth quarter, better than any of the quarters before.

We'll take our final question from Patrick Walravens with Citizens.

Great. This is Kincade on for Pat. I was really excited to see that you guys have announced the three big wins, as well as the 100 qualified opportunities in the pipeline. I was wondering if we could get a little color on how many of those three wins were driven by features you guys already have implemented versus features you have on the horizon? And the same question for those 100 qualified opportunities.

It’s all based on what we have and sold. We're not selling a roadmap, but existing products. Again, Content Lab and Genie are exciting, and we invite everyone to check them out on our website. So it’s 100% selling what we have and not what we're planning to have. The same goes for the 100 qualified opportunities.

Is there anything you’re hearing from customers about what they want beyond what you guys have?

I think we're leading more than they are, in terms of explaining the art of the possible. Content Lab is really about automating the video production process. It reduces cost and time, increasing your ability to monetize quickly on video. The Genie product is about creating a hyper-engaged, video-first experience for learning. We are also planning to expand capabilities beyond video and embed them into places like websites to enhance customer experiences.

This concludes our question-and-answer session. I would like to turn the conference back over to Ron Yekutiel for any closing remarks.

Thank you, everybody, for joining the call today. Have a beautiful rest of the week. Take care. Bye-bye.

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