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

Thank you, and good morning. With me today from Kaltura are Ron Yekutiel, Co-Founder, Chairman and Chief Executive Officer; Yaron Garmazi, Chief Financial Officer; and John Doherty, Kaltura's incoming CFO. Ron will begin with a summary of the results for the fourth quarter ended December 31, 2023, and the company's plans and expected trends for 2024. Yaron will then review details of the financial results for the fourth quarter and full year of 2023, followed by the company's outlook for the first 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 quarterly report on Form 10-Q for the quarterly period ended September 30, 2023, and other SEC filings, including the annual report on Form 10-K for the fiscal year ended December 31, 2023, to be filed with the SEC. Any forward-looking statements made in this conference call, including responses to your questions, are based on current expectations as of today, and Kaltura assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Please note, we will be discussing a non-GAAP financial measure, adjusted EBITDA during this call. For a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP metric, please refer to our earnings release, which is available on the company's website at www.investors.kaltura.com. Now I will turn the call over to Ron.

Thank you, Erica, and thank you, everyone, for joining us on the call this morning. Today, we reported total revenue for the fourth quarter of 2023 of $44.5 million, up 1% year-over-year and subscription revenue of $40.8 million, up 3% year-over-year. Adjusted EBITDA for the quarter was $0.8 million. We posted record high total revenues in the fourth quarter, which also marked the fifth consecutive quarter of year-over-year growth. The quarter wrapped up a year where, as we had previously forecasted, we saw increased subscription revenue and growth rates and despite declining professional services revenues, as expected, total revenue growth rates also increased. As for our bottom line, the fourth quarter was also a second consecutive quarter of adjusted EBITDA profitability and a positive cash flow from operations, both for the first time since 2020. It was also our highest adjusted EBITDA results since the fourth quarter of 2020. This concluded the year with marked bottom line improvements year-over-year, where we posted $2.5 million of adjusted EBITDA losses compared to $28.3 million in the prior year and reduced our cash flow used for operations by $38.5 million from $46.8 million to $8.3 million. As we draw 2023 to a close, we are pleased to have achieved and surpassed our revenue and adjusted EBITDA guidance for the year, delivering on our goal of accelerating revenue growth while also returning to adjusted EBITDA profitability in the past two quarters and has forecasted dramatically improving our cash flows. At that end, we are reaffirming our expectation of posting both a positive adjusted EBITDA and positive cash flow from operations this year. Moving on to the business update. While bookings and retention results in the fourth quarter continued to be lower than in 2022, we closed more deals achieved higher new bookings and posted…

Thank you, Ron, and hello to everyone on the call today. I'm very excited to join Ron and the talented Kaltura team. I firmly believe that Kaltura has the potential for significant growth in an exciting domain and that it is well positioned to lead the market. I'm looking forward to the exciting journey ahead and to getting to know many of you personally soon.

Thank you, John. And now over to you, Yaron.

Thank you, Ron, and good morning, everyone. I would like to start off by welcoming John and thanking Ron and the team for the amazing past seven years. My period at Kaltura left me with great learning, close friendship and very found memory. I'm very excited about the road ahead of the company, and I'm confident that it has the right leadership, right product and the right strategy in place to return to a meaningful profitable growth and to lead the market. As Ron said, I shall be supporting John and the company on a full-time basis throughout the second quarter to ensure a smooth transition. As Ron also said once a Kalturian always a Kalturian. Now back to our financial results. As I review the fourth quarter and the full year fiscal year results today, please note that I will be referring to a non-GAAP metric adjusted EBITDA. A reconciliation of CapEx to non-GAAP financials is included in today's earnings release, which is available on our website at www.investors.kaltura.com. Total revenue for the fourth quarter ended December 31, 2023, was $44.5 million, up 1% year-over-year. Subscription revenue was $40.8 million, up 3% year-over-year, while professional services revenue contributed $3.7 million, down 18% year-over-year. The remaining performance obligations were $185.3 million, up 8% year-over-year, of which we expect to recognize 59% as revenue over the next 12 months. Annualized recurring revenue was $164.7 million, up 3% year-over-year. Our net dollar retention rate was 99% in the fourth quarter, up from 96% in Q4 2022. Within our E&P segment, total revenue for the fourth quarter was $31.6 million, up 5% year-over-year. Subscription revenue was $30.4 million, up 5% year-over-year, while professional services revenue contributed $1.1 million, up 13% year-over-year. Within our M&T segment, total revenue for the fourth quarter was $12.9…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Matt Niknam with Deutsche Bank. Please proceed with your question.

Hi, guys. Thanks so much for taking the question. Maybe two, if I could. One, Ron, if you could talk about some of the confidence you have in terms of improving market conditions that you referenced and when you could maybe see this driving more positive inflections in subscription revenue? And then secondly, just in terms of competitive backdrop, if you could just talk about what you're seeing there? And then any change in terms of competitive dynamics over the last couple of months? Thanks.

Thank you, Matt. And hello to everyone on the call today. Let's start with the first one, confidence for market conditions. Let's wrap what we had this quarter by way of demand and trends and leading indicators. It was, as mentioned, the highest booking quarter of last year, albeit relatively flattish, but also the best retention that we had in the year past, and it's also coming back to the levels that we had prior years, which are much better. So from a net booking perspective, it was a better quarter than the ones before. Again, it's been a tough year, and it's another quarter of improvement. We're going to wait a bit and see where things go, but it is headed in the right direction. Also important to note that as we wrapped up the year and our bookings had come down from the year before by about 25%. As mentioned earlier, we also had about 25% less salespeople than the year before, which is the first time that we've actually done that. And so productivity hasn't fallen down. It has kept -- and now that we've become profitable, we could invest and we could put more, we believe we could cater to the demand with more people. So it's not just about the demand, it's our ability to cater to the demand. But other points to your question about demand, we look at the leading indicators we had throughout the year. We look at the QM that qualified by marketing leads. They continue to grow, and they grew sequentially throughout the whole year. They had come down from the year before at the beginning of the year, but ever since have gradually climbed up. And also the RFP submissions have also grown materially, both sequentially and year-over-year. And…

It does, yes. Just one quick follow-up. In terms of sales cycles, are you seeing those may be shortened or maybe stabilize? Just curious in terms of how that's been impacted as well of late?

Good question. Not yet. But the good news is that the ones that have come in into the pipe are gas are going to need to come out. So they do come out. We are closing the deals. As mentioned at the beginning of the year, the pressures, the headwinds that we've seen that have caused this year to be our past year 2023 to be so off are a significant lengthening of the sales cycle as well as price pressures, and we're still seeing that. Too early to say that it's suddenly getting better. But as mentioned, since win rates are held in the top of the funnel is continuing to grow, then what comes in must come out, and we are closing these deals. So we believe there will be more opportunity to close these deals in 2024.

That's great. Thank you so much.

Thank you, Matt.

Our next question comes from George Iwanyc with Oppenheimer & Co. Please proceed with your question.

Thank you for taking my question. And just to start off Ron, best of luck on what's ahead, and congratulations to you, John. So maybe, Ron, starting off with kind of the comments on the sales productivity. Can you maybe give us some perspective on what you're expecting from a hiring perspective this year and when those additions might happen during the year?

Sure. Happy to do that. So first, on sales productivity, as mentioned, it had kept compared to last year, but I can also say it's broadly aligned with the pre-COVID productivities. But we had -- we do quite materially our sales force after growing it always year-over-year. We had a 25% drop in order to be profitable, but also aligning us to the lesser productivities than during COVID. We're not ready given our profitability metric and the ability of additional salespeople to contribute in a decent way. It's not as great as it has always been, but we're ready to do that. And even if it is the existing productivity over the last couple of years, it's still good. And so far as numbers, order of magnitude of maybe another 10 at this point, we're doing it gradually. We're doing it throughout the year. There's going to be more focus on inside sales, commercial sales rather than outside sales, but we're going to increase both because we want to continue going down market, a discussion we could continue separately, and that's important for us. But that's the order of magnitude. Does that address your question?

Yes. And Yaron, maybe on the net expansion number, that was up year-over-year, but it did decline a little bit on a quarterly basis. Can you give us some perspective on what you're seeing there from an expansion perspective and what your expectations are for 2024?

Yes. So first of all, you are right, there was a decline of 1%. It was 99% this quarter. But as you can see, for the year, it was 100%. We said in the previous call that we believe that for the short term, it's going to be around the 100% based on the fact that we saw, as Ron mentioned, the improvement in both bookings and retention rates, we believe that we will be able to see are coming to a bit better numbers than the 100%. But at least for the short term, and I believe that this is the new normal obviously, if and when we will see a reacceleration of both bookings and retention rates, we do believe that we will see an increase to the rate that we saw before COVID, which was in the low 100.

Thank you.

Our next question comes from Gabriela Borges with Goldman Sachs. Please proceed with your question.

Hi, good morning. Thank you. I wanted to follow-up on your comments on the macro. I appreciate the detail. I wanted to understand what you think is driving that? How much of this is just curve normalization, we're a couple of years out and customers are ready to reinvest again. Any qualitative color from your customer conversations that you can share with us?

Well, thank you, Gabriela. I think we had the two back-to-back issues, right? COVID was the first one when people said, we've just bought a lot. Give us a bit of time to figure out what we're doing in a more strategic way. And we heard a lot of that in the end of 2021, the beginning of 2022. When people said, listen, there were a bunch of different systems that we had bought. There's a bunch of new use cases that we're powering. We want to make order in the whole thing, give us a few quarters or less, and we'll come back to you with thoughts. And they said that they love the fact that we can consolidate and offer a solution across and the fact that we could offer even more mission-critical services that are more tightly integrated that could be customized and tailored to their needs. And everybody said, "Look, we understand video is a new normal and something that happened here, we intend to do more in video. Just as this was getting ready to impact us, we have the financial downturn. So I think ever since over the last 1.5 years, a couple of years, it's more the financial downturn than a post-COVID impact. People said, look, we already know that we want to have more. It's just now is not the right time. And so, we have the price pressures and people staying with incumbent vendors, even if it's not the most ideal system, saying that they're going to make a switch later on, but that's the main, main rationale. Also bear in mind that sometimes some of the products, definitely, the internal ones are FTE-based licenses. And so if there's also reduction of FTEs because companies are letting go people as opposed to hiring then that in itself is also pushing against usage. And so I think that was the biggest issue so far. And what we're hearing from folks now is they're saying, look, we waited enough we need to be smarter about what we do. Our goals are not just 2024 goals. They're also 2025 and beyond, and we're spending too much money and it's still complex plus there's more things that need to be done. Now I want to be cautious about this and our guidance is in that as well. It's not yet time to celebrate. This industry has gone down, and it's gradually hopefully going to start going up again. But at this point, we're seeing our competitive advantage being accepted in the market, and there is interest in moving forward with Kaltura. Let's see how quickly that goes.

That makes sense. And on the sales productivity metrics, remind us, how long does it take typically for a deal to go from top of the funnel to close? How long does it take typically for a salesperson to ramp up to full productivity? And any color on the trading and enablement that you're providing to help with some of the larger deals and some of the hostile? Thank you.

On the third one, training enablement is that for the customers or enablement for our new salespeople.

The latter.

The salespeople. Okay, good. Let me start with the last. I mean, we're definitely very structured in how we're onboarding folks into the company, and we're a video-first company. So we have everything video five. We have an internal group that's also experts in training our customers, and they're the ones that are also helping us. So, we do that well. To your first question, connected to that or the second one on the ramp-down in our models, we put six months ramp for outside salespeople. And three months ramp for CSMs, and we factor that into our expectations around booking. I can tell you that most salespeople if they come in and to get some leads, they could start selling before. But that's for us to be careful in our modeling around when booking is going to hit. And so far as the sales time line, it varies between the different markets. Media and telecom, which is why most of our focus was not there. It was more on the E&T is longer sales cycle. If you're coming into a new logo, it could be sometimes 1.5 years, 2 years. It's a lengthy discussion and then even more so, the deployment times are relatively long and the time that it takes all the way to profitability is longer. Back to my point that we've, during downtimes, have always enjoyed the organic growth of users within the existing customers, which is quite significant. This quarter, we added hundreds of thousands, but we're putting our foot off the gas a bit and try to hunt new customers that will take longer to bring and longer to make revenue and longer to make profit. On the enterprise side of the business, it's usually had been somewhere around six to 12 months cycle, albeit that as we've come to offer more low touch products. And we've moved from internal, which is more content management to external, which is more event than they have shortened. But over the course of the last year, given trends that have happened in the industry, it has started to elongate. And we're seeing things go beyond the year, which is in line if you talk to major large software companies out there. So, we don't have enough statistical answer to tell you if it's exact 12 months or 18 months, but it's not a few months' time. On average, we definitely have in time to time deals that come in. And I'm talking about new logos, not upsell that are way faster. Education is a tweener. It takes sometimes - depending on the situation, there's also cycles around when they actually deploy the software for the new learning year. But I'd say it's closer to added price than the other ones. Does that address your questions, Gabriela?

Yes, thank you for the detail.

Thank you.

Our next question comes from Ryan Koontz with Needham & Co. Please proceed with your question.

Thanks for question and welcome to John coming on board. On your guidance there for subscription for the year flat, how would you unpack that in terms of churn and down sell kind of negative impacts on your returning customers versus new logos or new customers as part of that guide? Thanks.

First of all, when you were saying about the declining guidance for Q1, actually, what you see is that, as Ron mentioned, we had some pressure on the year from booking and retention level which were lower than 2022, obviously. But at the same time, we do see an increase in Q4, both on retention rates and in booking rate. At this point, if you look on our forecast, obviously, we'll see an improvement because we are comparing to Q4, which was much higher than what was expected before. So the basis was higher. So in effect, it's a decline, but from our forecast and even compared to the numbers that you saw before, it's not really a decline guidance for this year. And we do believe that as - hopefully, we will see continued increasing both retention rate and booking rate, you will see a situation that the second part of the year, it will start to improve. And obviously, at this point, we are trying to be very thoughtful with our guidance. But what was the specific other question?

It was around downsell versus new logo. I could address that, if you'd like. Let's start with the fact that we've not taken any assumptions that are not happening already over the past few months. So we're not assuming any strengthening. We're not assuming any change. We're assuming that things would remain, albeit that we do expect and hope that things are going to get better. Meaning that if we're looking at retention rates that we're currently seeing, we're expecting them to continue forward. We're also expecting from a ratio of downsell versus full churn in the last quarter, only 12% of the churn of the loss that we've had of any dollar was associated with initial service or product. Most of it was budget issues, price issues and the majority was still done through not full departure of customers but through downsell. And so we're assuming an MDR that would continue the trends of what we've seen. We're assuming productivities for both upsell and that are more or less aligned. And so everything is at this point, guided to flattish, which obviously, we've kept the necessary cushion for us, but we also want to be very, very thoughtful given the past of the year that we've seen. Is there any more specific questions that you have on this or you want me to address front?

No. That was good, but I will follow up here, if I could, on the inside sales focus. Is that more on renewals? Or is this on more lead qualification for your inside sales hires?

So most of our customers have been managed by outside sales. The ARPU let's look at the average MR. We have 1,000-ish customers and we have 175-ish million of revenues. So the typical customer here is being us around $170,000, that's the average. But if you also look at the median, this is, by and large, large enterprise sales. What's happened as of recent is over the last couple of years, as we've added the products that are enabling us to go to that market is that we're targeting both small and medium enterprises as well as departmental sales. And by doing so, we're going to be doing that through more blow touch inside sales. And therefore, because it's a new corporate for us, it's not so much renewal. It is more new. And we have that coming from the top of the funnel, and we divide that based on the size of the opportunity between the different sales team. Now one other thing that we did do this year in order, to kind of double-click on the size of the opportunities because our big customers are quite big, coming back to my earlier statement about ARPU. We have a lot that have climbed, by and more in growth into multimillion-dollar opportunity, and we believe we could copy pace that again and again. So what we've actually done this year for the renewal side is have taken at this point, somewhere around one-third of our customers that are larger, and have moved them into a team that is more automated, that's working on lower touch renewals in very structured approaches. And if that works out, we are gradually going to do more and more and we're going to leave the outside sales team to address the 80% of the revenue. Which usually is 20% of the customers and get that five times, 10 times growth and bring more and more multimillion or very high figure numbers. So we're thinking -- we're very thoughtful about how to optimize efficiency in the sales force and how to maximize the output. But happy to talk more about that later, if you like.

That's great, Ron. Thanks color.

Thank you, Ron.

[Operator Instructions] Our next question comes from Austin Cole of Citizens JMP. Please proceed with your question.

Hi there. Thanks for taking the question. Ron, I was just wondering if maybe you could talk about what some of your conversations have been like recently with regards to AI and kind of what those features are adding to your platform and what the response has been like from customers? Thanks.

Yes, thank you, Austin. Over the last quarter, we just mentioned that we expanded our AI assistant for even events. The quarter before, we mentioned how we did that for preparing events, and we said that we're going to continue to add features that will be during the event in order to offer real-time recommendations and how to increase engagement. And we've added that, we're seeing very good acceptance for that. We're also working on a bunch of other features that we will announce when they come out. We, in addition to our in-house work, have worked on our accelerator program and have increased the number of customers and vendors there. We have a couple of dozen each. And so, we have more folks that are helping add value, because the virtue of Kaltura of how flexible and open it is, is that it could be a bus to connect to a lot of innovation from the ecosystem. In addition, the customers that are in discussions with us, across a variety of industries are expressing a lot of interest around AI in all its fashion. It is not yet, and I said that at the beginning of the process, turning into immediate significant revenue. I think the entire industry understands that as we continue to add these things, we're going to monitor what part of it will be baked into the existing costs, and prices and what part of it will be additive. And I think that over the year, we'll gradually provide more and more info about how this is impacting growth in revenue. The one thing I will state is that for me, it's clear and over time, hopefully, we could provide more statistics around it, that AI will cause for a lot more videos to be created and a lot more videos to be consumed in a more contextualized way. So regardless of how one monetizes it, whether it's a usage based, a user base, to value-based, the value of the system is going to increase in a material way. And we're seeing folks echo that. A lot of customers, as I mentioned, quite significant across multiple industries are equine that. So we're seeing continued trends. But as mentioned earlier, it's not one of these things that you'd expect the next quarter are going to come and say, here's the amount of revenue. This is how much it's moving the needle for the company. It's a multiyear move and we're advancing there. That works for you, Austin? You guys still hear me?

I appreciate that.

Thank you. We'll move on to our next question, which is coming from the line of Michael Turrin with Wells Fargo. Please proceed with your question.

Hi, guys. This is David Unger filling in for Michael Turrin. Thanks for taking the question. I just wanted to see if you could double-click on some of the demand trends. I know we heard some comments around geography, but I wanted to double click on what you're seeing by geography? Anything specific in terms of vertical strength? Thank you.

Sure. On the geo side, we're seeing stronger in North America and a bit weaker in Europe. It's been consistent throughout the year, and it's connected immediately to macro and the current geopolitical situation, et cetera. On the vertical side, it's not so much just a demand issue. We've been, as mentioned, over the last couple of years, focused more on the enterprise, more so than EDU or median telecom, just by way of how quickly that could convert the size of the TAM and how quickly we could bring about our new technologies to market to bear. But we're continuing to play across all of these. I mentioned earlier, we closed even to that extent, education opportunities in Europe, which are the two that I mentioned that are a bit less than the focus. So we're attacking it all. I can tell you, media and telecom. We increased a lot of users in Europe were in engaged in conversation with a bunch of customers that are generally outside of the U.S. But if I were to say given the macro situation, most of the focus and most of the upside is North America enterprise.

Can you just talk about the biggest areas of focus as it relates to driving profitability of the business? Thank you.

Yes, first of all, I'm very content of the improvements that we've done over the last year. As you know, first of all, the last quarter, it was the second quarter in a row of adjusted EBITDA profitability and cash flow profitability, our cash flow ops, which is great, and the year has been a massive leap forward compared to the years before, not a big surprise because we said that we're going to do this, and we have done this in the past. We've demonstrated it yet again. What I like is that we've done that at the same time that we have hit our revenue goals, and we are still growing faster than the industry. And so the reason was that we did not drop the ball and completing the big important moves that we have made in order to expand our TAM, our ARPU and our competitive positioning over the last few years. So while we cut - I wouldn't say flat, but we make sure that at the right time we reduce what we could reduce, we didn't cut muscle and we're able to move forward and continue to grow. Let me turn it to Yaron to give you a bit more thoughts about profitability and areas of focus, and maybe I'll add a couple of words after.

Great. So two important points. First of all, regarding the gross margin, we are working very hard in order to continue to improve it. In the short-term, you should probably not see a significant improvement, but we will try to get a few more points here and there. In terms of the gross margin. Ron mentioned the fact that we are going to invest - start to invest back in sales and marketing based on the change that we see in the market under the assumption that it will continue to change. But as mentioned, we are committed by the end of the day to post both positive adjusted EBITDA and positive cash flow from operations for this year.

Very much appreciate the detail. Thank you.

Thank you. We have reached the end of our question-and-answer session. So I'd like to pass the floor back over to Ron Yekutiel for closing remarks.

Yes. Thank you, everyone, for your great questions and for participating today. As mentioned, we're feeling okay about the year that has passed. We achieved what we said that we would. And at the same time that we're strengthening our capability to lead the market forward. It's been a tough year. We believe there's a good macro directions that are going to improve next year. We're thoughtful with our guidance and beyond anything and everything. I want to thank, again, younger maze for his great partnership and work with the company. He's still with us in month ahead helping us and to welcome John, quite excited about him joining the team, a lot of great things for us to do together this year. Thank you, everybody, and have a beautiful day.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.