Good morning, everyone, and welcome to the Kaltura's Third Quarter 2022 Earnings Call. Please note that this event is being recorded. All material contained in the webcast is sole property of 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 of the third quarter ended September 30, 2022, and the trends in areas of focus that are expected to impact the remainder of 2022. Yaron will then review in greater detail the financial results for the third quarter followed by the company's outlook for the fourth quarter and full year of 2022. 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, 2021, and other periodic SEC filings, including the quarterly report on Form 10-Q for the quarterly period ended September 30, 2022, 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'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 for the third quarter of 2022 of $41.1 million, down 4% year-over-year and subscription revenue of $37.9 million, up 1% year-over-year. Adjusted EBITDA for the quarter was negative $7.2 million. In our last earnings call, we made 3 important financial forecasts. An expected return to revenue growth in Q4, fueling a higher year-over-year growth rate in 2023, expected gradual quarterly improvements in adjusted EBITDA towards a single-digit loss next year, and an expected significant improvement in cash flow with a forecasted single-digit aggregate cash flow from operations loss in the second half of this year. Today, we are reaffirming all of these 3 forecasts. Regarding revenue growth. After a tough year that saw an initial quarterly decline in subscription and total revenues, followed by close to flat revenues we are forecasting for Q4, a sequential revenue growth rate at a level that we have not seen since the first half of last year. Regarding profitability, while the effects of our recent cost reduction have only partially affected this quarter, we have already seen a reversal of the trend of our bottom line with an adjusted EBITDA loss that is lower than that of the last 3 quarters. The improvement in profitability is expected to continue in the coming quarters as we continue to execute on our plan to return to profitable growth. And regarding cash flow, we had a positive cash flow from operations in the quarter. We expect that our aggregate cash flow from operations in the second half of this year would be a single-digit loss as previously forecasted. We remain committed to rebalancing the company's cash flow as we have done in 2019 and 2020 without requiring…

Thank you, Ron, and good morning, everyone. As I review the first quarter results, please note that I will be referring to a non-GAAP metic adjusted EBITDA. A reconciliation of GAAP to non-GAAP financials included in today's earnings release, which is available on our website at www.investors.kaltura.com. Total revenue for the third quarter ended September 30, 2022, was $41.1 million, down 4% year-over-year. Subscription revenue was $37.9 million, up 1% year-over-year, while professional services revenue contributed $3.1 million, down 41% year-over-year. These figures also embody an approximate revenue reduction of $0.4 million as a result of currency headwinds that occurred during the third quarter. These headwinds are forecasted to continue and rain on our revenue during the fourth quarter as well. The remaining performance obligation were $169.2 million, up 4% year-over-year, of which we expect to recognize 65% of the revenue over the next 12 months. Annualized recurring revenue was $152.9 million, up 1% year-over-year. The remaining performance obligations and annualized recurring revenue metrics also operate the impact of the currency headwind that occurred during the third quarter. Our net dollar retention rate was 96% in the third quarter compared to 100% in Q2 2022. Though our gross retention rate remained in line with our long-term historical levels even higher than that of the last 3 quarters. Note that this quarter net dollar retention metrics incorporate the full impact of the large customers, as I mentioned in our last earnings call, reduced some of their business resulting the fourth quarter of 2021. This customer has seen [indiscernible] with us and partner with us on new ones, including in the passing quarter. Net dollar retention metrics also incorporate the impact of the currency headwinds that occurred during the quarter. While downward pressure on net dollar retention has seen impact the coming…

[Operator Instructions] Your first question comes from Gabriela Borges with Goldman Sachs.

This is Jake Tilman on for Gabriela. Ron, you mentioned that Q4 will grow sequentially at a level that we haven't seen since the first half of 2021. Are you assuming that the macro environment improves to achieve that level of growth in Q4? Or do you currently have enough visibility into revenue to be confident in that guide?

Jake, thank you for your question. No, we're not assuming and we have enough confidence to support the guide. We've long stated that the second half of the year, we saw acceleration. We said earlier that we were hoping for it to be Q3 and it got pushed into Q4. And indeed, Q4, we already have the numbers in pocket that support that.

Got it. And then for my follow-up, last quarter, you talked about how bookings rebounded to highest level since, I think, Q3 of last year. How did Q3 of this year compared to Q2 and the trends improve or worsen on a monthly basis going through the quarter?

Thanks for that. Let me give you some color on the quarter. So first to your question. Q3 bookings were somewhat below Q2, but they were still better than Q1 and Q4 of last year. The singles with sales force productivity on average, and that was conducted more or less a similar amount of ramp salespeople as the quarter before. Maybe a bit more color as we look at the trends, most of the booking was as usual from enterprise, then followed by EDU and M&T at the same level, but enterprise was by far the strongest poll. Same split between upsell and use, same geo, same channels and a bit less services in line with recent trends over the year in which it's more and more low touch and less and less services. There were some good tailwinds that continued forward. First is kind of the overall underlying shifting work streams online, digital transformation, but now even more as you get into the economic situation, saving money by reducing travel costs. So that's good. We are seeing customers that are looking to improve budget efficiency and consolidate vendors. And Kaltura is one of the only vendors that could really support any type of event plus internal use case, et cetera. We're seeing more opportunities open up for Events. And by that, I don't mean the large conferences events, but any event of any size, internal, external and the percent of the event deals from our total bookings continue to grow. We are seeing that expand beyond tech into multiple verticals. Initially, ed tech and now we have banking and business services and pharma and education and manufacturing. In general, financial services continues to be really strong for us. EDU, we've seen very strong win rates continue. We're seeing Event…

Next question comes from Matt Niknam with Deutsche Bank.

Two, if I could. Just first on adjusted EBITDA. So I just want to make sure I understand this correct. If you're exiting the year at an implied $6 million EBITDA loss, Yaron, I think you mentioned next year, the anticipation is still a sort of single-digit million EBITDA loss for '23. So I'm just -- if you can maybe help us think through the road map to achieving that level. And then secondly, on the net dollar retention rate, I appreciate some of the color you gave. Maybe if you can just help us unpack where you're seeing some more outsized pressure? I think you had mentioned there's an expectation that remains pressured in 4Q before reversing next year? And any sort of specific segments or verticals where you're maybe seeing a little bit more pressure there?

Thank you very much for the question,. So regarding the first question on the adjusted EBITDA, you're right. If you just take the Q4 adjusted EBITDA multiple by full, you do not get to the previous targets that we gave that we do believe that next year is going to be a 1 digit plus adjusted EBITDA. Obviously, you need to take also the growth that's going to happen from the top line even if you take just the current run rate of the revenue for this quarter and take it with no additional bookings, net booking, then you get to a very similar growth rate for next year, but we believe that the number will be higher, which will help us to balance the expense base. At the same time, I can tell you that there were some onetime expenses that were we occurred in Q3 -- in Q4, which are not going to impact the rate next year based on our current plan. And the third line item is that we didn't materialize all the savings that we planned for this year, meaning some of the cuts that we did because of notice period, et cetera, will impact mostly Q1 numbers. So the full impact is not yet embedded in the numbers. We still believe and we are planning the company in a very thoughtful way in the P&L in order to achieve the adjusted EBITDA 1 digit adjusted negative adjusted EBITDA for next year. And we do believe that we have a time to do it. By the way, even if by the end of the day, we will see that top line is not behaving as we plan that it's going to behave right now. So we still have room to play. And the plan is…

It does, it does.

And just 2 more points, Matt, on your questions for myself, Ron. One, on the adjusted EBITDA, and you've heard there's stuff in pocket that's going to probably hopefully bring us better than currently guided. But beyond that, we'll continue to do better next year. But I just want to note again that we were profitable in 2019. We were profitable in 2020. Remember that, that was a single most asked question when we build the company and why did we do that? And we said we fundamentally believe in that, and we worked hard to get there, so we know how to get back there. We've proven that in the past, and we're proving it time. We'll continue to. The second, on NDR and Yaron addressed our gross retention that indeed has always been good and continued and is even better this past quarter and that there's a gap and the impact between that because NDR looks trailing 12 months looks at historical gross retention, but also looks at the comp here being a tough year with COVID and also looks at FX. One data point that I'll throw out there. if you take into consideration both the single customer reduction that we had mentioned, the large 1 that is coming back and growing and already turning around to be growing on a sequential basis. And if you take off the FX impact, we would have been at about 100% plus. So it's obviously not enough. We'd like it to be higher again back into the comp year that we're looking at but it is a few points higher if you would have taken these factors out.

Next question comes from DJ Hynes with Canaccord Genuity.

So Ron, I want to double click on some of the corrective actions that you've taken internally. I think I would have expected to see a little bit more EBITDA margin improvement in Q4. I think I understand based on kind of your explanation that this is still a work in progress. So maybe talk about like where you are in terms of implementing some of these changes? And then more interestingly, to me, like what are the biggest risks you're keeping an eye on from an operational standpoint as you consolidate business units inside of Kaltura and lean out the organization?

Sure, DJ. Thanks for the question. So first of all, to remind us when we made the cut, there was a 10% reduction from both our fully ramped full-time employees as well as consultants and otherwise, so on both accounts, both for the part-time and full-time folks. . We did that swiftly and effectively by the way, employee morale [indiscernible]. If you're asking about 1 important thing to keep an eye on that would have been voluntary departure rates. They've been kept and actually receive less voluntary departure. As a recent I think it's not just the economy of what's happening around us. It's the very concrete plans that we've had and the clarity in the company about what we're trying to achieve and the overall engagement rate of employees in the company as always. The majority of the cost savings hasn't impacted yet Q3. Most of it is going to come into Q4. To give you a feel, the impact in Q3 was $1.7 million a quarter. The impact on Q4 is going to be $2.7 million more bringing it close to the full $4.6 million impact. So there's more impact that's coming in Q4 than there was in Q3 materially, and that's going to help us from an adjusted EBITDA. And I will note again that we're trying to be thoughtful about the numbers. There's also some onetime stuff in Q4. So the various reasons mentioned, we're hoping to do better, and we're definitely continuing to expect to do better later on. So that's a bit about the changes. Now so far as the reorg, I mean, we discussed that last time that there were various things that we streamlined. We moved to have 1 marketing team instead of marketing being split between the business units, the 1…

Yes. No, it's super helpful color. Maybe a follow-up. Look, we're hearing from others in the virtual event space that's pretty tough out there. We've seen kind of this pretty significant shift back towards in-person activity. You're highlighting virtual events as a bright spot for Kaltura. Like what are you seeing that others aren't? And why do you think that's playing out?

That's a great question. So a few things. So first, when we discussed this earlier this year, we've been less focused on catering to large flagship events the ones that come with a lot of services and also known as kind of a Tier 1 event. And instead launched this year, and I've been beefing up our event platform offering, which is self-operated, it powers small, medium-sized events. These are the type of events that are putting together tens or hundreds of people at times. They could also be thousands, also known as Tier 2 and Tier 3 as opposed to just Tier 1. So we're not really talking about powering virtual conferences. If you hear about some of the folks out there that are talking about the huge events that are online that are now becoming hybrid and we're now moving more physical. That's the big, big events. But we do run the gamut from internal to external from marketing to customer education, sometimes even full-blown conferences, but it's more training, executive communications, small digital gatherings. So it's not just the large stuff. And the unique element about us is that we are the 1 product that addresses all these use cases. So while the COVID effect has come down and companies are still seeking to engage ways to bring together their employees, partners, customers online, actually into this macroeconomic environment, the argument is that online gatherings are even more so important because of travel savings and improvement efficiencies and also, obviously, given the distributed workforce and work from home. So I don't think anybody expects -- but suddenly, everybody is going to work in the office and everybody is going to fly all over the place is just that the mega conferences are not 100% remote, and that's…

Yes, sure does.

Next question, Michael Turrin with Wells Fargo.

This is Austin Williams on for Michael Turrin. I just wanted to follow up on DJ's question and touch on competitive positioning and the pricing side of things. I think you mentioned that there was some pricing compression from other vendors in a response to a previous question. So I guess just can you provide an update on how the competitive landscape is evolving and just if you're seeing any pricing compression on your side as a result?

Yes, happy to do so. I mean you've heard some of the other earnings calls, and you've seen that most of the other folks out there, all of them are talking about headwinds. They're showing sequential decreases. They're talking about a reversal of growth somewhere around the middle of next year. They're either providing or not providing guidance for Q4, but it is looking like a sequential decline. And happy that in our case, there is some degree of earlier turnaround, given the nature of what we're doing. You also heard for some of them that they're talking about the power of the enterprise sale, which is what we have always been doing large enterprise, but we're not doing SMB. And 1 thing to clarify, when we are getting even into Webinars, it is more product-led growth type initiatives and aim at the SMB market, small and medium enterprise, not small, medium business, definitely not consumer. So it's more a departmental sale and the ability to just quickly in a more easier fashion get into the enterprise. So I think we're very much aligned with what's working out there. I think we have a very strong offering given the financial situation and people looking for 1 solution to address multiple use cases, which we have more than others. So statistics doesn't show that we have any issue as compared to other competitors. Our close rates -- our win rates are maintained very high. And the flip side, we're showing the financial recovery at a level that is faster than some of the other guys mentioned -- for reasons mentioned.

Next question comes from Ryan Koontz with Needham & Company.

I was hoping you could walk me through your progress in the self-service model and what your kind of updated thinking is there? It sounds like you're moving toward a lower touch model and maybe you could just kind of walk us through some of the nuances there between self-service and low touch and what you've learned since you've launched some of your new products?

Thanks, Ryan. So in general, and I just mentioned that we are -- we came from the content management world where it was a CIO-type sale, long sales cycles, large enterprise, very sticky. It takes a long time to deploy and to sell. And we -- as we've expanded, not replaced, but expanded also into CMO use cases with additional products that were launched over the last couple of years, including the virtual classroom, webinar and events and now the event platform, we started getting into areas which could cater to a smaller enterprises, but also to faster deployment cycles, which is important for us. So the very first product there was more of the EP product, the event platform product, which is low touch in the sense that people could immediately get events going. They don't need to have a lot of professional services. And again, that part of our revenue has come down, but we've built our products to better support that to require less professional services. So that was the first part. And we've established our commercial sales team that's increasingly selling against these lower-touch opportunities as opposed to the outside sales team. But what we've done now with this release of webinars, which is for the very first time, a very formidable offering for complete self-serve is to really enable more around complete online sales. And like I said earlier, it's more for the purpose of product like growth still catering to SMEs and departmental sales. And so I mentioned earlier that we had improvements around simplifying the creation and management of webinars for the organizers and that we've also made the experience more engaging for SMBs. Just a few quick examples. We have automatically generated landing pages now that users can at their logos and…

Next question, James Corey with Bank of America.

This is James Corey on for Michael Funk. Last quarter, you guys talked about churn levels being in line with historic levels. And I guess they were a little bit lower this quarter. But can you talk a little bit about where you expect those levels to be heading into '23, especially as the macro worsening? And a follow-up to that would be what additional levers can you guys pull if the macro has worsened to ensure you reach your EBITDA targets?

I'll take the first 1 and let Yaron address the other one. I mean, yes, gross retention remains strong, and it was actually the best 1 that we've had in the past year since Q3 2021. Again, they're all best practice for large enterprise-type sales. I'll throw you it's a single-digit annual run rate for our gross retention annualized, if you run it over the quarter. So it's great. . It was a good number, by the way, for both M&T and EE&T, both of them doing work very well. What do we expect next year? I mean we don't see a reversal of this trend. Could there be some more downward pressure on this because of reduced pricing from existing customers that could push price. That could be -- to be clear, when we talk about retention rates, obviously, it's inclusive of full churn as well as any price reduction that's baked into that number. So there might be a bit more pressure given the financial situation. But again, we're not seeing indication. Right now, as we look into Q4, we are looking into a similar maybe even better, hopefully, but not a deteriorating situation in Q4 compared to what we said right now. So we'll keep you abreast as we finish next quarter and as we continue to look forward. We'll let Yaron talk about levers for adjusted EBITDA. Go ahead.

Yes. So obviously, this year based on the guidance that we provided, and we feel very comfortable with the guidance. We will end the year with a negative adjusted EBITDA of around $30 million, which the second part of the year is definitely going in the right direction. And this trend is going to continue going into Q1 with the actions that already been taken. . So what we are doing right now, obviously, we are not just waiting to see if market or the macroeconomics can go to their own place. We are continuing a very thoughtful way to think, to consider some other options which we still have in our pocket that we can implement beginning of the year if and when we decide to do it in order to meet our targets. We feel comfortable that we will be able to achieve the 1 digit negative adjusted EBITDA for next year, which will create a situation that by 2024, we'll be also positive in the cash flow. Meaning we will be able to continue to run the company and still show a very nice growth numbers while basically eliminating the loss that we have on adjusted EBITDA base.

One small clarification. I just want to make sure because I just noticed that when I was referring to gross retention, I said single digit, obviously, it was the opposite, which is the gross churn. So -- what I meant is that it's above 90% gross retention, if it were to be a single digit and less so strong gross retention.

[Operator Instructions] Your next question comes from Tom Blakey with KeyBanc Capital Markets.

A lot has been discussed already in terms of what I would characterize as continuing to be a relatively difficult environment that you guys are managing your way through well. As we look out to calendar '23, I'm not asking for guidance, but just like a framework around how incremental, I think a couple of other questions have asked about this. The macro is we talked about past pandemic headwinds and customer churn, Ron. I mean now we -- it seems like we're adding extra pressure here, ARR flattened out in the quarter. Is there any incremental color you can talk about in terms of the pipe, the strong bookings you talked about. and I have a follow-up for Ron. I'll just leave it at that.

In a few words, I'll pass it over to Yaron. So first thing about [indiscernible] let us be clear that the way we count the ARR is based on the actual subscription revenue anyways, just cleans up for ASC 606 type issues and for perpetual licenses and stuff like that. But it's really -- it's not looking into the future. It's not a run rate of booking. It's the effective subscription revenue for the quarter. . And so since we know that Q4 is going up, if one would have used kind of a CRR or an end of quarter obviously would have been growing and I'm putting aside the exchange rate impact. So it is in decline because Q4 expected to be an up quarter, and we have that in pocket. Again, it's not a function of Q4 bookings because Q4 bookings will affect the future in our Q4. So just to be clear that we are continuing to grow. And in fact, like I said, I think in our industry, -- the only company that I'm seeing going -- there might be some out there, but the ones that have looked at that are showing that behavior as soon as Q4 this year and so far as growth. And by the way, if you look at the numbers that are looked there, given the guidance range we've put, it kind of turns it into a record quarter in the sense of revenue because at the beginning of the year, we had it down because of the single customer and then flat because of the behavior of this year, some downs and flats depending if you look at subscription in total, now it's coming up and guided to be actually a top record revenue quarter compared to Q3 the…

Yes. I think that in terms of looking on next year, the encouraging part, as Ron mentioned, is the fact that the gross retention is still strong and we have -- we don't see too much pressure on this line item. Also, I'm not sure what's going to happen with the currency exchange it for the last 3 or 4 quarters, had a negative impact on us due to the fact that we have pretty significant part of our revenue coming, especially by the way, media and telecom coming from Europe and Europe started 115 a year, now it's around 1. By the way, it's closed the quarter much below. So at least going into Q4, we see some improvement. The big question is obviously, if the growth that we are seeing in Q4, the sequential growth how much of it will continue into next year. If it's going to stay flat, basically, it's going to be something like a similar year in terms of the growth rate. So can we assume that bookings will not generate additional revenue for next year? It's a conservative assumption, and maybe it's going to happen by the end of the day. But at the same time, any additional booking will start push the numbers above where we closed it this year. And we have to see what's going to happen with the currency exchange. And obviously, with gross retention, which is still strong. So it's a mixed bag situation, but we do feel that the conservative scenario is what we see right now. But obviously, yet to be seen, we will be very thoughtful and against steep. We are going to manage our bottom line or to meet our targets.

Yes, that's a perfect segue, Yaron. In terms of my follow-up, you're very clear in terms of your guide for a single-digit loss of EBITDA into 4Q '23 and then you just added to it there in terms of your prudence on the top line. That's loud and clear and strong relatively. How is gross margin looking that? We haven't had an update, I don't think on this call about -- we talked about in prior calls, mix shifts, scale and M&T. Obviously, I don't know how new self-service offerings would impact the gross margin? How should we expect gross margin to trend into next year as we look ahead?

Yes. So obviously, you saw that in E&T, basically, it was flat gross margin in this quarter. By the way, despite the fact that we have pressure on top line, which, by the way, in our case, gross margin impact mostly the top line currency exchange impact mostly the top line, and therefore, it has some negative impact on gross margin. In M&T, we saw some pressure in gross margin. Some of it came from the fact that we have a onetime drop in revenue in M&T, which looking into Q4, it's going to balance itself and is going to turn around. So the same level of expenses, but we had this short-term decline in Media and Telecom, which by the way, related to the fact that some of the revenue recognition line item in Media and Telecom is a project base, and we had some catch-up in Q2. It went a little bit down in Q3, and we already see the situation that it's coming back. Also, most of the impact from the currency exchange is in Media and Telecom, and therefore, you see the pressure on top line, which creates a pressure on gross margin. But looking on next year and going into the future, we started the year with -- last year with 60 the low 60s, now it's in the mid-60s. It's almost the same on a quarterly base. We do believe that we will still see some improvement coming mostly for Media and Telecom and from 2 main reasons. First of all, as we mentioned before, it's going to be less professional services. And you already can see that as a percentage of revenue, we do see a decline in professional services compared to the overall revenue. So this is losing line item in terms of gross margin, and it's going to be much, much smaller. And also the efficiency that we are implementing in Media and Telecom will continue to push the number high. Looking to next year, we definitely see a continuing improvement in gross margin, which will come mostly for Media and Telecom. I don't see a significant improvement at this point in EE&T. We said all along that for the long term, we do believe that we started as a private -- as a public company for -- low 60s. We say that at the end of the year, we'll bring it mid 60s and for the long term, we always say that we believe we will be able to take it all the way to the 70s.

We've come to the end of our Q&A session. I will now turn the call over to Ron for closing remarks.

Thank you all for making time and for your great questions. Looking forward to a strong quarter ahead of us. Be well and stay healthy. Take care. Bye-bye.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.