Kaltura, Inc. (NASDAQ:KLTR) Q2 2024 Earnings Call Transcript

Kaltura, Inc. (NASDAQ:KLTR) Q2 2024 Earnings Call Transcript August 11, 2024

Operator: Good morning, everyone, and welcome to the Kaltura’s Second Quarter 2024 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 Mannion: Thank you 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 results for the second quarter ended June 30, 2024, and provide a business update. John will then review the financial results for the second quarter of 2024 in greater detail, followed by the Company’s outlook for the third quarter and full year of 2024. 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, 2023, and other SEC filings, including the quarterly report on Form 10-Q for the quarter ended June 30, 2024, 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, during this call, we will be discussing a non-GAAP financial measure, adjusted EBITDA. 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’m pleased to hand the call over to Ron.

Ron Yekutiel: Thank you, Erica, and welcome, everyone, to our second quarter earnings call. Total revenue for the second quarter of 2024 was $44.0 million, up marginally year-over-year. While subscription revenue was $41.0 million, up 1% year-over-year. Of note, in the second quarter, we posted a company record ARR of $165.2 million. As for our bottom line, we posted in the second quarter adjusted EBITDA of $1.6 million, representing our fourth consecutive quarter of adjusted EBITDA profitability, and the highest result since the third quarter of 2020. Cash used in operations decreased to $1.6 million, an improvement from $4.1 million in the second quarter of 2023. Taken together, our results for the second quarter lead us to increase our revenue and adjusted EBITDA guidance for the full year, and to, once again, reaffirm our plan to post positive cash flow from operations for the full year.

Moving on to the business update. As expected, we saw renewed growth in new subscription bookings in the second quarter, which were at the highest level since the fourth quarter of 2022. In addition, the portion of new bookings from new Enterprise Education and Technology customers was at its highest level since the second quarter of 2023. Our bookings from new customers and upsells included 23 six-digit deals, spanning a diverse array of industries, use cases, and geographies. Customers include a large European government institute and a global pharmaceuticals leader, both new to Kaltura, one of the largest banks in the world, a leading healthcare software company, two of the world’s largest tech companies, a large U.S. R1 university, and two large telecom companies.

Use cases ran the gamut from customer marketing and engagement, employee and channel communication and re-skilling, student learning and engagement, and entertainment. Gross retention in the second quarter of 2024 remained at a similar level compared with the first quarter, which again was better than all quarterly results of 2023. This continues to represent an annualized gross retention rate that is higher than the previous three calendar years. The combination of both higher gross subscription bookings and increasing gross retention rates has yielded the highest level of net new subscription bookings in the last six quarters, helping to fuel future subscription revenue. On the product front, in the second quarter we continued boosting our event platform functionality and user experience with an improved SMB flow between sessions and admin group targeting, enhanced chat options, and a more robust analytics dashboard.

In addition, we enriched our video portal content management and guest landing pages, added new features for admin sessions in our real-time conferencing rooms, and continued advancing our video player and the scalability and security of our platform. Related to AI, this quarter we added a number of product enhancements. We launched our internally developed AI-based automatic speech recognition service based on Whisper as an improved alternative to the non-AI-based third-party ASR services we previously provided. With the help of AI, captions are automatically generated within videos regardless of the language spoken, enhancing accessibility and user experience. For our events and webinars products, we developed an AI-based email notification engine that automatically generates notifications for users based on ongoing session information, ensuring SMBs stay informed without manual intervention.

We also developed a real-time AI-based sentiment analysis of user chat communications for event organizers and presenters. For our video portal, we added an AI-based quiz generator based on the transcript. And for our video conferencing rooms, we launched an AI-based noise cancellation feature for improved audio. Our product leadership continued to yield industry awards as well this quarter. Amongst them are the 2024 Innovation in Business MarTech Awards for Best Virtual Events Platform, the 2024 Event Technology Award for Best Virtual and Hybrid Event Platform, and four 2024 Eventex Awards for Best Event Technology, Best Audience Engagement Technology, Best Data Collection and Event Analytics Technology, and Best Virtual Events Platform. In the passing quarter, we also conducted our annual VIP events in New York, San Francisco, and London.

Hundreds of customers and prospects attended Kaltura Connect on the Road 2024 and discussed how AI-infused video experiences could boost their business results. We had an amazing speaker lineup of marketing and corporate communications leaders from customers such as Adobe, Salesforce, Novartis, IBM, Mayo Clinic, Bloomberg, Siemens Healthineers, AstraZeneca, and Red Hat. During the event, we gave out Kaltura Digital Engagement Awards to companies that have demonstrated creative and exceptional use of our platform and have expanded the possibilities of digital experiences in the enterprise. Recipients across nine different categories included ABN AMRO, Adobe, Audible, an Amazon company, Bank of America, Bloomberg, [FIDE], IBM, Intuit, Netflix, Salesforce, and Siemens Healthineers.

Lastly, I want to mention a couple of recent executive changes in Kaltura. Renan Gutman, our Chief Product Officer, and Lisa Bennett, our Chief Marketing Officer, are moving on after 10 and 17 years at Kaltura, respectively. We are appreciative of Renan’s and Lisa’s great contribution to Kaltura and wish them well in their new endeavors. Navi Azaria, who joined Kaltura 3.5 years ago as General Manager of our Enterprise Education and Technology Business and later held the role of Chief Revenue Officer, succeeds Renan as our Chief Product Officer and will also oversee marketing. Before joining Kaltura, Navi was the CEO of a data analytics company servicing enterprises and communications providers. Navi’s prior experience included other leadership roles overseeing product and engineering.

He also holds a degree in computer engineering. Liad Eshkar, who has been with Kaltura for over 10 years, has assumed the role of Chief Revenue Officer. Liad’s most recent role was that of Chief Business Development Officer. Prior to that, Liad led all our sales customers and partners in the technology sector, including the biggest and most complex Enterprise Education and Technology sales cycles and customers, which also contributed the most to our growth. Liad holds an MBA from Columbia Business School, an MA in business law, and a degree in engineering. In summary, as expected, in the second quarter we saw sequential improvement in our new bookings and continued to yield a gross retention materially above quarterly results from last year.

In light of that, and following our revenue and adjusted EBITDA outperformance in both the first and second quarters of the year, we are incrementally raising our revenue and adjusted EBITDA guidance for the year. We continue to believe there are stronger tailwinds ahead as companies reaccelerate their investments in digital transformation and online experiences. Fueling these initiatives are factors such as increasingly hybrid workplace, growth in Gen-Z and millennial video savvy employees, cost savings by consolidating multiple enterprise video use cases around a single video platform, and the advent of Gen-AI, which will bring about more creation and consumption of videos and increased ROI. We believe these trends will continue to grow our new bookings, accelerate our revenue growth, and increase our profits.

With that, I’ll turn it over to John, our CFO, to discuss our financial results in more detail. John?

John Doherty: Thanks, Ron, and hello to everyone on the call today. Kaltura continues to make important adjustments to its business including improving our operating efficiency, focusing on further monetizing our existing customer base, adding new logos and reallocating resources towards higher ROI opportunities and markets. I want to touch on a few highlights in the quarter that demonstrate this. The highlights include our sequential and year-over-year increase in new bookings, which more than doubled from Q1 and represents the highest new bookings since Q4 2022. Our sustainable level of gross churn for the second quarter in a row, an improvement from all quarters last year, and if annualized, represents a high watermark for the last three fiscal years, our seventh consecutive quarter of year-over-year revenue growth, driven primarily by strength in our subscription revenue, our growth in remaining performance obligations, and the highest ARR to date.

All of which is culminated in what we see as strong positioning to achieve our profitability targets with higher gross margin than the three prior quarters, lower year-over-year operating expenses and continued improvement in adjusted EBITDA, representing the fourth consecutive positive quarter, as Ron mentioned earlier. With that, let me move on to our results. Our results exceeded expectations for both revenue and adjusted EBITDA for the quarter. Total revenue for the quarter ended June 30, 2024, was $44 million, up 35 basis points year-over-year and above the high end of our guidance range of $42.7 million to $43.5 million. Subscription revenue was $41 million, up about 1% year-over-year and above the high end of our guidance range of $39.6 million to $40.3 million.

Professional services revenue contributed $3 million for the quarter and is down 4% year-over-year. We expect professional services revenue to continue to vacillate. I will touch on this more when I provide an update on our guidance for the third quarter and full year. The remaining performance obligations were $177.8 million, up 8% sequentially and 2% year-over-year, of which we expect to recognize 60% as revenue over the next 12 months. Consistent with what I mentioned last quarter, this $12.5 million increase in RPO was anticipated and is a result of our strong booking of renewal and improvement in new bookings in both Enterprise Education and Technology and Media and Telecom in the quarter. Annualized recurring revenue of $165.2 million, up 2% sequentially and 1% year-over-year.

This is the highest ARR we have achieved to date and is reflective of increased subscription revenue in our Media and Telecom business. Our net dollar retention rate for the quarter was 98%. This reflects no change from the first quarter and is down from 100% in Q2 2023. As I mentioned last quarter, we expected NDR for the quarter to be lower due to lower net bookings last year as NDR is a lagging indicator for gross retention and upsell booking. This result was, therefore, better than expected, and we continue to expect it to improve in the second half of 2024 given the sequential improvement in gross retention that we have demonstrated over the last four quarters and the sequential increase in bookings. Within our Enterprise Education and Technology segment, total revenue for the second quarter was $31 million, down 1% year-over-year as expected.

Subscription revenue was $29.8 million, down 2% year-over-year, while professional services revenue contributed $1.2 million, up 33% year-over-year. Within our Media and Telecom segment, total revenue for the second quarter was $13.1 million, representing 3% year-over-year growth. Subscription revenue was $11.2 million, which is up 7% year-over-year, while professional services revenue contributed $1.8 million, down 19% year-over-year. GAAP gross profit in the second quarter 2024 was $28.7 million compared to $28.6 million in second quarter 2023, resulting in a gross margin of 65% for the quarter, consistent with Q2 2023. Within our Enterprise Education and Technology segment, gross profit for the second quarter was $22.9 million, representing a gross margin of 74%, similar to Q2 2024.

Subscription gross margin was 81%, which is up from 79% in Q2 2023. Within our Media and Telecom segment, gross profit for the second quarter was $5.7 million, representing a gross margin of 44%, up from 43% in Q2 2023. Subscription gross margin was 55%, down from 57% in Q2 2023. Total operating expenses in the quarter were $37.2 million compared to $38.2 million in the second quarter of 2023, a reduction of 2% year-over-year. Adjusted EBITDA for the quarter was $1.6 million, an increase of $2.6 million from negative $1 million in Q2 2023. This result, along with our improving expense profile indicates our focus on improving our operating efficiency over time. GAAP net loss for the quarter was $10 million or $0.07 per diluted share. This is an improvement of $0.8 million or 7% year-over-year.

Turning to the balance sheet and cash flow. We ended the quarter with $71.3 million in cash and marketable securities. We consumed $1.6 million in cash from operations during the second quarter, which reflects a significant improvement of $2.5 million compared with $4.1 million in Q2 2023. This includes the impact of a delayed $2.3 million payment from a large customer that moved from Q2 2024 to Q3 2024 due to their corporate entity restructuring. With this payment, which has already been received, we would have generated positive cash from operations in the second quarter. In the first half of 2024, we consumed $2.8 million in cash from operations compared to $11.6 million in the same period last year and $8.8 million year-over-year improvement.

I would now like to turn to our outlook for the third quarter of 2024 and for the fiscal year ending December 31, 2024. Throughout 2023, we experienced pressure on our revenue growth due to year-over-year declines in gross retention and new subscription bookings, along with reduced demand for our lower-margin professional services that was driven by our expansion into products that are easier and faster to deploy. While gross retention improved in recent quarters, new bookings were still low in the first quarter for reasons mentioned in the last earnings call. Last quarter, we guided towards an expected sequential decline in both subscription and professional services revenue for Q2 2024, expecting downward pressure on subscription revenue that had accumulated in prior quarters would catch up to us in the quarter.

While we did feel some of that, we were able to manage through it with stronger gross retention and new bookings and have come out above guidance, as I mentioned. Revenues from professional services were indeed sequentially lower as also expected. For the third quarter, we are forecasting a sequential stabilization of subscription revenue, which we believe will be followed by a return to growth. We are also forecasting a continued sequential decline in our lower-margin professional services revenue, which has the positive benefits of enabling faster deployments and higher gross margins. Accordingly, we expect subscription revenue in the third quarter to be between $40.5 million and $41.2 million and total revenue to be between $42.6 million and $43.3 million.

We expect adjusted EBITDA in the third quarter to be between negative $0.3 million and positive $0.7 million. As we look towards the full year, we expect to see an increase in subscription revenue, driven by our improved gross retention rate and new bookings as well as the continued decline in revenues from professional services. As a result, for the full year, we are increasing the bottom of our guidance ranges for subscription and total revenues, up by $2 million and $1 million, respectively, and narrowing both guidance ranges from $3 million to $2 million. Accordingly, we expect subscription revenue for the year to be between $163.2 million and $165.2 million and total revenue to be between $174.7 million and $176.7 million. We expect adjusted EBITDA for the year to be between $2 million and $3 million, which compares to the negative $2.5 million adjusted EBITDA of 2023 would be an improvement of $5 million at the midpoint of the guidance range.

As Ron mentioned, we also continue to forecast a positive cash flow from operations for the full year. We believe the Company continues to be well positioned to benefit from emerging tailwinds we are seeing of spend consolidation to a single vendor, digital transformation and the hybrid workplace that is continuing to drive demand for video-based offerings. As we move into the second half of 2024 and beyond, we expect to continue to demonstrate that we can achieve both revenue growth and sustained and improving profitability. We believe that we are on the right path to achieve these objectives and to drive consistent returns to our shareholders. We are encouraged by the increased adoption of our products, demonstrated by our increase in bookings, our sustained high gross retention rate and deals in our pipeline that we believe could yield continued growth in bookings and by what we believe will be growing the industry tailwinds in the second half of the year and in 2025.

With that, we’ll open up the call for questions. Operator?

Q&A Session

Operator: [Operator Instructions] The first question is from Gabriela Borges from Goldman Sachs.

Gabriela Borges: Ron, you mentioned the impressive work of some of the larger customers that you have in the prepared remarks. [Indiscernible] from a number of software companies that as some of these large enterprises evaluate their AI plans, it can sometimes change how they’re thinking about spending with one specific software vendor or on course of some of the software. Maybe share with us a little bit how some of those customers in the enterprise are thinking about their AI road maps? And to what extent does that even pull forward their enablement with Kaltura or perhaps in some cases push it out?

Ron Yekutiel: Yes, AI is very exciting. It is very exciting for large enterprises. And at our Connect event around the world, we had a very detailed discussion with a great many of them, and they’ve all come extremely excited and have come out even more so about the possibilities and opportunities behind AI. The huge discussion there is how you could bring about further content creation faster moderation of content in order to make sure that the right people are getting the right content in the right time and in the right context in order to improve their results, whether be it internally for reskilling and learning and training or be it externally for better marketing and sales and better conversions of funnel. And what people get excited about Kaltura is several — several things.

Number one, the depth of the integration into the workflows, the fact that we don’t just say here, we have video plus AI, but the video is going deep into learning with our integrations into LMS or going deep into marketing through our integration into the workflows for marketing. The second thing they really like is that we have a federated approach towards data with very advanced data collecting information. And right now, increasingly, we’re becoming the single vendor where people have all the data pool on our system. And the reason this is really important, consider when you’re trying to track the behavior of a prospect or a customer through multiple events, you want to have a system that would know how to track them across all their different interactions so that you’d know what is their taste, what is their interest, what products do they like, what service do they appreciate.

And Kaltura is able to bring that to better prompt the system in order to yield better results. And of course, when you put on top of that integration into the workflow and the metadata and data information that we have, the engagement layer that we offer, then we have a full sandwich that’s really exciting. So customers are looking forward. We had mentioned this quarter of all the exciting releases that we’ve done around AI across multiple areas. As stated, we have both on the E&T and the M&T, a lot of releases that have been put in place, both the new transcription and translation engine that we have fueled by Kaltura as well as the way to analyze reactions in real time as well as in the M&T side, better ways to curate content as well as to further engage and better recommendation at the user level.

So there’s a lot there.

Gabriela Borges: The follow-up for either Ron or John is the normalized growth question. So you’ve talked about how the bookings last year have impacted the revenue this year. Your comments on bookings today are actually more positive. Given everything you know about what customers have been doing with Kaltura, new logos, cross-sell, et cetera, how do you think about the normalized growth profile of Kaltura in the medium term?

Ron Yekutiel: Yes. Let me say a few words about booking trends in this quarter and then let John speak a bit about maybe forward-looking and thoughts about where things could go. And so yes, Q2, as you said, were more positive. It’s correct. It’s the highest new bookings since the fourth quarter of 2022. So it’s better than earlier quarters throughout all of last year. It was also as expected, a sequential increase compared to Q1. We also had larger deals compared to Q1. So we had more six-digit deals than in general. We also saw a sequential increase in the number and in the dollar bookings from you customers. So not just total between upsells and new but also in the new. And that was also achieved with larger first deals. So our ARPU had grown, in fact, it’s the highest ARPU since the first quarter of 2023.

By the way, just about trends, most of the new bookings came from North America enterprise, but most of the new logos came from Europe, from EMEA enterprise, both in the dollar and in the percentage in the number of units and in the dollar value. So we’re seeing a good turnaround of the European market. We still see customers that continue to consolidate around Kaltura for both internal and external, and that touches on the earlier comment about having data across the Enterprise. And we’re seeing success across many sectors. Again, we’ve — I’ve noted a few from tech and financial services and government and professional services and pharma and healthcare and education, of course. And we also see continued awakening in the Media and Telecom market.

So both organically growing as well as new potential customers that are picking up. You remember that market tends to be a bit clunkier. And — but we’re seeing some good buying signs there and we’re excited as we look into the future. And maybe a couple of other points that I would note that we mentioned earlier, price increases in the first quarter, and we said that, that had gone up. We continue to see that. It was actually 3x the booking we had a year prior in the second quarter of 2023. So competitively, we’re able to command better prices for better value provided by Kaltura, even compared to our own services offered the year before. And then from a lead Gen perspective, we still saw a sequential increase in the meeting set by SDRs and RFP.

So, all in all, the trend is going in a good direction. Again, this isn’t as high as we expect it to continue to be and grow. There’s a lot more to grow, a lot more to look forward to. We still broadly see the headwinds that we believe will turn into further tailwinds, but I’ll let John comment on that.

John Doherty: Thanks, Ron. So we talked about how we were working through some of the headwinds that were coming out of 2023. And that was — some of that was in our guide for Q2. It’s also a bit in our guide for Q3 overall, but we did come out and as we’ve mentioned, we would be where we guided to in Q2. So we’re certainly managing through it. The stronger bookings, the increase in RPO, we think, bodes well for where we’re headed as we finish this year and as we head into 2025. And our guide certainly supports that as well.

Operator: The next question is from George Iwanyc from Oppenheimer & Co.

George Iwanyc: So John, maybe building on the guidance. Can you give us a sense of what linearity was like as the quarter progressed and into July?

John Doherty: For the quarter specifically, and yes, I’ll talk about through June. I won’t necessarily talk about into July. But — and it’s not unlike any typical quarter, you see strength towards the back end of it. And that’s what we saw in the second quarter. Our guide reflects both for the third quarter and full year, where we expect. But certainly, as I said, there are certain things that we’re managing through as a business. One of the keys that I’d focus folks on as we move forward is also what we’re doing around gross profit and margin in particular. Our guide does support the fact that we’re going to see a little bit lighter PS, but PS comes with lower margins than subscription. We’re confident where we’re headed on the subscription side of things.

And as we’ve also talked about, we have a strong focus on each kind of line item of profitability. And I think that’s showing up in terms of what we’re doing with gross margin, where we expect gross margin to be plus our performance around adjusted EBITDA and cash flow, which is obviously a critical importance for us and for shareholders.

George Iwanyc: And Ron, with the leadership changes that you highlighted, are you making any changes to the organizational structure, especially on the sales side? And kind of following up on that, John, would you maybe give us some highlights from an investment priority standpoint over the next six months?

Ron Yekutiel: Yes. Obviously, we continue to optimize the organization. We do that at least once a year as we look into the situation, both in the market as well as where we’re at and where we could take it to the next level. As part of the changes that were made, yes, there were various optimizations made and everybody is excited about that. The energy levels are high. I’ll give you an example. I mean marketing have been put now under Navi’s organization, but trying to put together closer product marketing, marketing together with sales enablement in a way that would streamline better. SDRs have been moved. They were for a system period on the marketing organization, they’re back in the sales organization. Within the sales team, we had further double down on large enterprise opportunities within the core team that had moved the smaller ones into what’s defined as kind of our operations team, our customer care group in a separate place where they are doubling down and kind of fishing with a net versus the others that are fishing with fishing route in a more effective way.

And within that, we have further focus on verticalization. So there’s a list of things as we get to any one of these changes, we think broadly, and we kind of collect all the wisdom points that we’ve gathered for recent quarters, and we’ve come back with a good outcome, and we have great leaders leading the teams going forward. Like I said, energy is really high.

John Doherty: And I guess the other one was to me in terms of investment priorities. I covered some of that in — when I spoke a moment ago, but just to kind of highlight. So continued improvement around operating efficiency. You certainly — some of the leadership changes allowed us to do that at the top level as well as flow some of that through the organization. In addition, we talked about lighter PS, that also provides — presents us with an opportunity to make some related cost adjustments there as well. In addition, Ron covered kind of broad focus on AI across the business and how external customers are using it as well. Certainly, we’ll present us with an opportunity, both to enhance our product portfolio as we deploy it across different parts of our product portfolio, but also in how we run our business and how we can gain some efficiencies from the deployment of that from an overall operating perspective.

Additionally, we have seen some growth in M&T. I don’t want to say revitalization, but we think that business is also set up pretty well to provide some growth going forward, and that wasn’t always the case. So certainly, we’re working closely with that team and that’s one of our priorities. And then Ron touched on this, but it’s key and also can be part of our profit and margin story is focusing on growing within our existing customer base. So, where they have a certain engagement, there’s other opportunities for us to work across existing clients and you’re starting — you’re certainly starting to see that based on what we reported this past quarter and what we see going forward from — what we talked to from a bookings perspective.

Operator: The next question is from DJ Hynes from Canaccord Genuity.

DJ Hynes: Congrats on the nice bookings quarter here. Ron, how would you characterize the environment as we think about the go-forward opportunity between new customer growth versus cross-sell kind of as you look at the pipeline? Is one faring better than the other? Or how would you kind of frame that?

Ron Yekutiel: Yes. So I’m going to take you back to my general comments that I’ve made on this topic in previous calls. And I said that way back, we were more or less on a 50-50. And then it had picked up during COVID to 75-25 favoring new logos. I guess there was a kind of a rush by those that didn’t have it to go ahead and get it in a very short period. Followed by a turn to the other direction, which had become more 25-75 in favor of upsells after COVID, where people stuck to their guns and each one kind of stayed with a vendor because even though many had understood that there’s a longer-term opportunity in consolidating or improving or going to a better solution, many were quite myopic in their budget process or risk averse to the point that they have stuck to the main vendor that they had.

We expect it to continue to kind of shift back towards the 50-50, I’d say. There’s a lot of opportunity around upsell as we offer new products. The number of customers over the years that have three-plus products like Kaltura has grown consistently year-over-year. And so people are buying more and moving from inside and outside in multiple events and multiple activities. We expect that to continue, but we do expect gradually to see a rebound in new logos. Especially, as I said earlier, when companies stop being myopic and have the opportunity to think forward, what’s better for them for the next few years, not just for that year. Should they switch to a vendor that would not just provide the more value but would actually offer them a more cost-efficient solution because there’s economy of scale and you could save money on the mid to long term by switching to a unified leading vendor.

And as I said, this is where we win with a knockout. I mean we — in various places are better. But if you’re looking at a unified platform that brings it all together. And I also mentioned earlier the virtues of that from an application level insofar as data harmonization that people move to us. So, the short answer is expect a relatively faster growth in new bookings over time. Does it mean it’s going to be next quarter or the one after it’s gradual? But ultimately, we’re coming back to the 50-50.

DJ Hynes: John, a follow-up for you. So, look, we posted record bookings or, I guess, record recent bookings. Churn has stabilized, but you’re guiding subscription revenue down sequentially at the midpoint in Q3. Is there anything from a revenue recognition standpoint that we should be aware of? Or are you just trying to keep numbers in a spot where you know you can hit them?

John Doherty: Certainly nothing from a revenue recognition perspective that you should be concerned about. As I mentioned, we’re still working through some of what happened in 2023 relative to our lower bookings. We feel we’re in a very strong shape. And as we said, I wouldn’t characterize it as you did in terms of relative to how we approach guidance. But certainly, I would say our posture is still conservative. Yes.

Ron Yekutiel: I’ll add one more thing. Just to remind us, because we’re working with large enterprises and in most cases, deployment takes a few months. I’m not even talking about M&T where it could take a year or sometimes more. But on the E&T front, it’s not an immediate kind of launch in most cases. Then from a revenue recognition per your point, if you’re seeing a revival or a growth. In bookings, it usually is at least a quarter lag into the behavior of revenue. And so Q1 was a lower booking and Q2 was where it was. Q3 is more a reflection of Q1 than it would be of Q2. So that’s not completely an odd. Put that aside, obviously, we’re thoughtful in trying to leave space in order to achieve more than we guide for that. Every company does that, and so do we.

Operator: The next question is from Ryan Koontz from Needham & Co.

Ryan Koontz: Actually, the improvement in bookings, what are the top factors there you attribute that to across, say, change in the product or changing your own go-to-market processes?

Ron Yekutiel: Yes. First of all, let’s just remind us that the first quarter is typically lower. We also said there were a couple of deals that have been pushed from the first to the second, which had caused it to be lower. By the way, we had closed them in the second. And so we were expecting to see a rebound in the second. The second point is from the general macro move, 2023 was a historic low. We could come back to retention later. It was lower in retention. It was definitely low in bookings, and we expect that to turn around. It was a low behavior across the industry. It’s not just Kaltura and we expected and are seeing better signs, better buying signs this year. But yes, we are continuing to beef our products. We are continuing to strengthen and solidify our position across multiple markets.

In the case, for example, of our expansion from VOD and live into real time associated also with the move from internal solutions into external for CMOs, this has been getting stronger and stronger. And we’re able to take away customers from other vendors and expand customers that are just internally into external and increasing ways. The ones that have started with us with one event or a few things are now consolidating further and growing. So we believe the momentum is being built, and we believe it will continue to be built in the quarters ahead.

Ryan Koontz: And on the core gross margin for your subscription product, what are the kind of keys to getting that margin up? Is it mainly scale because it picks costs? Or are there any other levers you have there to get that gross margin up?

John Doherty: Yes. It’s truly scale and also making sure that we’re focused on the right spaces from an overall customer profile perspective.

Ron Yekutiel: Just remind us on a good question that ultimately our gross margin is also a blend between subscription and PS. And regardless of our ability to build scale and increase subscription, the fact that we’re going to have less PS and the fact that we’re going to have a better blend is going to increase our blended gross margin to a higher level as well. In addition to your question.

Operator: The next question is from Michael Turrin from Wells Fargo.

Unidentified Analyst: This is [Burnett Shaw] on for Michael. I would love to double click on the AI investment and how that’s translating into deal pipeline conversion? Like any metrics that you guys would shine light on would be super helpful.

Ron Yekutiel: Yes, sure. Again, let me just reclarify what we’ve been doing by way of AI because it comes on the heels of more work that we’ve done earlier. I mentioned the fact that we added the new ASR solution, which is based on Whisper and that’s automatic capturing. We use third parties to date to do the whole transcription work. And from now on going forward, it’s predominantly Kaltura, which not only improves the quality and the ability to do this real-time multiple leverages, et cetera. But also to earlier question about margin improvement could support margin improvement. I mentioned improvements around AI for events with capabilities to automatically generate e-mail notifications as well as the sentiment analysis for chat.

So we’re learning better our end users and how we could better cater to them. We had a new AI quiz generator in our video portal, which enables to increase ROI so that within the portal itself, it could generate the right quiz in the right context. This is taking us closer to a world where you could have kind of this Khan Academy on steroids where people continuously learn based on their individual knowledge and get pushed and creation — created content for what they need to get. We also talked about noise cancellation, so improved quality of audio in rooms grove. And as I said earlier, this is just the beginning. And the big focus for us in the second half is around content repurposing. We are — a big package is going to be released, that is going to talk about how we — to repurpose content in an automated way, provide AI summaries for key insights for specific users.

And of course, everything else I mentioned earlier about Media and Telecom. We have our TVG chatbot, which was for a search and recommendation, looking for similar people like you, personal home page and channels with daily recommendation feeds for each. And then for curation of content, we have our AI curator assistant for dynamic content editing and suggestions and clips and subtitling, so a lot. To your question about how this is monetized. We keep on saying the same thing. It’s a bit early days, and you’d find that across the entire industry and those that are talking about things getting picked up and maybe kind of a year-over-year growth in these things. It’s year-over-year were a zero number. And so we’re going slowly on declaring exactly what the impact is going to be.

Is it helping us win more business? Is this helping us increase the ARPU? As it were, like I said, the ARPU for new logo in the last quarter was the highest — it’s been for a long while. And so yes, it could be that it’s supporting our ability to sell and sell at higher numbers. I also mention our ability to renew and increase the size of our existing customers. Could that be also supporting it because people are happy? It doesn’t mean that we necessarily charge for it separately. At this point, we’re not charging for separately. We will continue to consider our ways in the future.

Unidentified Analyst: And then just a follow-up for John. Can you remind us how you think about capital deployment given your current cash position on the balance sheet and the buyback that you announced earlier this quarter?

John Doherty: Sure. I mean let’s focus on the buyback first. I mean, certainly, where we announced it on the 11th of June, we effectively, we had a bit of a cooling off period. We started — we launched it on June 25th. So there’s really only a few days actually in the quarter itself, where we were actually in the market. We purchased just over 100,000 shares during that window of time. And which was effectively resulted in using about $130,000 of the $5 million that was authorized by the Board. We’re going to — we continue to invest in the business, first and foremost, in areas that where we see opportunity for growth. AI is being one from a main new focus point. However, we did feel it was important given where the stock had traded to for whatever reasons that we don’t need to get into.

But ultimately, it was in no way shape or form reflective of the underlying business performance. So with the Board’s support, obviously, they authorized the buyback, and we thought it was an important tool for us to have in our toolkit. We continue to be active in the market this quarter and to monitor it. But certainly, we’re doing what we can. And our main focus about — around capital deployment is to doing what we need to do to ensure that we’re moving this business in the right direction and putting it in place to maximize value for shareholders.

Operator: The next question is from Matthew Niknam from Deutsche Bank.

Unidentified Analyst: This is [Michael Allen] on for Matt. I just want to dig in a little more on the churn. So it sounds like it’s improving. Was there an area where there was improving more? I know you talked about last quarter, down sales were 75% of the churn. Just wondering if there’s any area where you thought that there was improvement this quarter and where you’re seeing the trajectory to be better?

Ron Yekutiel: Yes. So yes, so in the second quarter, as noted, we posted the same high quarterly gross retention that we did in the first quarter of the year. And you remember there, it kind of followed three consecutive quarters of improvement. And we also noted that the current gross within rate is the highest since the fourth quarter of 2022, so better than last year, which again was abnormally high for us and for the industry. And also kind of saying that it represents an annualized retention rate that’s better than the last three fiscal years as well. So, it’s all together in a point that we’re feeling good about. To your question about down churn versus or partial term versus full churn and still kind of the same, around 25% of our churn with full churn this quarter versus about 75%, which was down sales.

So it’s the same ratio. And it was both in M&T and in E&T. So there’s no specific topical area that’s associated with that. And so no special area to put a finger on other than it’s at a better place than it was a while back and it’s definitely maintaining the level of Q1. We continue to forecast that the second half of the year is going to be better than the second half of last year and then the year is going to come out with a much better place than last year. I will just note again the NDR discussion, which is a lagging indicator. In the second quarter, we posted the same results as the first quarter. In fact, as the fourth quarter since the last three quarters were the same number, it’s a better result than what we had thought. We mentioned in the last earnings call that we expect it to dip further, so it’s good that it didn’t.

And we do believe that the direction of the NDR being lagging that it will turn around in the coming quarters. So that’s my summary.

Operator: The next question is from Patrick Walravens from JMP Securities.

Patrick Walravens: It’s nice to bookings rebound. So I noticed in the script that you guys called out deals with two of the world’s largest technology companies. And then one thing that I’ve just noticed in my travels, Ron, is when I’m going to one of these user conferences, sometimes you got to wait a long time for the sessions to be available in the app. And then other times, like at the NVIDIA GTC conference this year, as soon as you walk out, you can — like literally the second you walk out of the session, you can start watching the replay. And then I noticed that’s the Kaltura players. So I’m just wondering how big is that opportunity for you guys to power more of the user conferences of these big companies? How much do you guys make when you get an AWS or Dreamforce or an NVIDIA GTC? And how many more of them are there out there?

Ron Yekutiel: So yes, first of all, you’ve mentioned great technology companies and some of the largest ones, we indeed are very glad and honored to be providing solutions for the companies you had mentioned and many others that are leading tech companies. We also appreciate the fact that these companies are the kind of, I’d say, “smartest” in choosing technology. They definitely understand what it takes to build great technology and how to test and vet great technologies. So the fact that we’re able to be there, we believe, is a prelude to being able to do much more in other areas in which we’re at. I’d say to your question first about getting content immediately after you step out. Yes, part of the value of Kaltura is the fact that when we consolidate the various video use cases, we also consolidate various video technologies.

To remind you, we originally, we’re a leading content management company based on Gartner, the number one for years. And we have expanded in 2020 from content management into also events and added real time. And we said that that we believe the historical divide between on-demand, live, and real time is not natural. But you’d expect to have a continuous experience that spans across various technologies because the users don’t care about technology. They care about their experience to your point about stepping out wanting to get the video immediately. And so we’ve put a lot of emphasis on being able to insert VOD within live and real-time experiences and to immediately convert and experience VOD right after, so that you have a continuum of experience before, during and after then.

So I’m happy you’ve noted that, and indeed, it is a big value that we provide. Lastly, to your question about the potential of these deals. Amazon at the time, I could say to that because for a certain period, they will also define as north than 10% of our revenue. They remain the second largest customer of the Company. They’re very large, multi-multimillion and there’s a lot more upside there as much as there’s similar upside in some of the other large companies that you have mentioned and more others that you haven’t. We are in discussions with various companies about potential upsells and growing these accounts. Both by way of the number of activities they do have the same type that they do with us today, also consolidating other vendors.

And as I said earlier, not just increasing quality, but also having better economy of scale. But also moving into other adjacent use cases so that they don’t use this just externally but internally and for other use cases. So yes, we expect this to grow. I would just finalize by saying the one KPI that keeps on growing until through our year after year after year is the average ARR per customer has always grown, continue to grow. And that is because we could offer more and more value for each customer.

Operator: [Operator Instructions] There are no further questions. At this time, I would like to turn the floor back over to Ron Yekutiel for closing comments.

Ron Yekutiel: Thank you very much for all your great questions and continued support and interest in Kaltura. It was a solid quarter from our perspective. But as we said, it’s generally within the context of years that have been quite tough with quite a lot of headwinds. We’re not declaring any form of victory. There’s a lot more work ahead. There will be one key quarter this or that direction. But at the end of the day, we believe we’re up and to the right, both by way of bookings and retention and how that translates into top line growth and for sure, how it also translates into bottom line profitability, both accrual-based and cash-based. We look forward to continue to demonstrate that and to generate both growth and profitability. Thank you, again, and have a great day and week.

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