KALTURA, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2022 , filed with theSEC onFebruary 24, 2023 (the "2022 10-K"). This discussion contains forward-looking statements based upon current plans, expectations and beliefs involving risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in Part I, Item 1A, "Risk Factors" of our 2022 10-K and other factors set forth in Part II, Item 1A, "Risk Factors" and other parts of this Quarterly Report on Form 10-Q.
Overview
Our mission is to power any video experience, for any organization. Our Video
Experience Cloud powers live, real-time, and on-demand video for webinars,
events, virtual classrooms, and video sites. We also offer robust Application
Programming Interfaces ("APIs") and Software Development Kits ("SDKs") for
developers and industry solutions for education and media and telecom. Our Video
Experience Cloud is used by leading brands across all industries, reaching
millions of users, at home, at school and at work, for communication,
collaboration, marketing, sales, customer care, learning, and entertainment
experiences. With our flexible offerings, customers can experience the benefits
of video across a wide range of use cases, while customizing their deployments
to meet their individual, dynamic needs.
Our business was founded in 2006.
We generate revenue primarily through the sale of Software-as-a-Service ("SaaS")
and Platform-as-a-Service ("PaaS") subscriptions, and additional revenue from
term license subscriptions. We also generate revenue through the sale of
professional services associated with the implementation of deployments for new
and existing customers.
In August 2022 , our Board of Directors approved a strategic restructuring
program (the "2022 Restructuring Plan") to streamline our operations in order to
support our investment in critical growth areas. The 2022 Restructuring Plan
included, among other things, a workforce reduction of approximately 10% of our
employees. In connection with the 2022 Restructuring Plan, during the year ended
December 31, 2022 , we recorded expenses of $1,238 , all for one-time employee
termination benefits. The 2022 Restructuring Plan was substantially completed in
2022. On January 3, 2023 , our Board of Directors approved a re-organization plan
(the "2023 Reorganization Plan" and together with the 2022 Restructuring Plan,
the "Reorganization Plans") that included, among other things, downsizing an
additional 11% of our workforce and adapting our organizational structure,
roles, and responsibilities accordingly. The total cost reduction from the
downsizing in connection with the 2023 Reorganization Plan on an annualized
basis is expected to be approximately $16 million . The 2023 Reorganization Plan
is focused on realigning our operations to further increase efficiency and
productivity, in reaction to the current macro-economic climate. The 2023
Reorganization Plan's main objectives are to position the Company for lower
demand, spend, and available budgets across our market segments, align our
business strategy in light of these market conditions and support our growth
initiatives and return path to profitability. In connection with the 2023
Reorganization Plan, we incurred pre-tax charges of approximately $1 million as
of March 31, 2023 .
The 2023 Reorganization Plan is expected to be substantially completed in the first half of 2023. See Note 18, Restructuring Activities, for further information.
We organize our business into two reporting segments: (i) Enterprise, Education,
and Technology ("EE&T"); and (ii) Media and Telecom ("M&T"). These segments
share a common underlying platform consisting of our API-based architecture, as
well as unified product development, operations, and administrative resources.
31-------------------------------------------------------------------------------- Table of Contents •Enterprise, Education & Technology: Includes revenues from all of our products, industry solutions for education customers, and Media Services (except for media and telecom customers), as well as associated professional services for those offerings. Subscription revenues are primarily generated on a per full-time equivalent basis for on-demand and live products and solutions, per host basis for real-time-conferencing products and solutions, and per participant basis for the Events product (which intersects on-demand, live, and real-time-conferencing video). Contracts are generally 12 to 24 months in length. Billing is primarily done on an annual basis. •Media & Telecom: Includes revenues from our TV Solution and Media Services for media and telecom customers, as well as associated professional services for those offerings. Revenues are generated on a per end-subscriber basis for telecom customers, and on a per video play basis for media customers. Contracts are generally two to five years in length. Billing is generally done on a quarterly or annual basis. It generally takes from six to 12 months to implement M&T offerings. The upfront resources required for implementation of our Media & Telecom solutions generally exceed those of our other offerings, resulting in a longer period from initial booking to go-live and a higher proportion of professional services revenue as a percentage of overall revenue. Additionally, a higher proportion of revenue comes from customers who choose to license our offerings through private cloud and on-premise deployments, which also impacts our gross margin. In the long-term, we expect the margins for this segment to improve due to the following: expected increase in the ratio of subscription revenue to professional services with scale, improved efficiencies of both production and professional services costs, and an increase in the proportion of revenues from media customers, which generally entail simpler deployments compared to telecom customers.
Reflected below is a summary of reportable segment revenue and reportable
segment gross profit for the three months ended
Three Months Ended March 31,
2023 2022
(in thousands)
Revenue
Enterprise, Education & Technology $ 31,330 $ 29,727
Media & Telecom 11,943 11,988
Total Revenue $ 43,273 $ 41,715
Gross Profit
Enterprise, Education & Technology 22,789 20,766
Media & Telecom 4,497 5,503
Total Gross Profit $ 27,286 $ 26,269
We employ a "land and expand strategy" with the aim of having our customers
increase their usage of our offerings and/or purchase additional offerings over
time. Our ability to expand within our existing customer base is reflected by
our Net Dollar Retention Rate (as defined below). For the three months ended
March 31, 2023 and 2022, our Net Dollar Retention Rate was 102% and 107%,
respectively. We grew our Annualized Recurring Revenue (as defined below), by 8%
in the three months ended March 31, 2023 , compared to the three months ended
March 31, 2022 , demonstrating our ability to land new customers with higher
spending levels and increase revenue from our existing customers.
For any given year, a large majority of our revenue comes from existing customers, with whom we are in active dialogue and tend to have visibility into their expected usage of our offerings.
We focus our selling efforts on large organizations and sell our solutions primarily through direct sales teams and account teams. In addition, we are investing in low-touch and self-serve offerings for smaller customers.
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Impact of COVID-19/Macroeconomic Events
Prior to the COVID-19 pandemic, the market demand for our solutions was growing at a robust rate, with numerous tailwinds for long-term growth, and that demand accelerated mainly in 2021 as a result of the pandemic. As the effects of the COVID-19 pandemic subsided in 2022 and the worsening economic climate and recession headwinds led to lower demand, we did not see this rapid growth trend continue in 2022 and do not expect it to continue in 2023. Moreover, due to the worsening economic climate we expect to face lower demand, spend, and available budgets across our market segments, and other adverse effects, although we cannot predict nor fully assess the actual impact, length and depth of such downturn. In order to adapt to these changes, we have adopted the Reorganization Plans as elaborated above, that included, among other things, downsizing our workforce and adapting our organizational structure, roles, and responsibilities accordingly. In particular, the 2023 Reorganization Plan is focused on realigning our operations to further increase efficiency and productivity, in reaction to the current macro-economic climate. As market fluctuations have not yet stabilized, it is not possible at this time to estimate the ultimate impact and results of these developments on our business, financial condition and results of operations. For additional information, see Part I, Item 1A. "Risk Factors - Risks Related to Our Business and Industry-We may not be able to successfully assess or mitigate the worsening economic climate and its direct and indirect impact on our business and operations, including our customers and vendors, or to correctly predict the duration and depth of the current instability of the global economy and take the right or sufficient measures to address it, and as a result our business, financial condition, results of operations and prospects would be adversely affected" and "Risk Factors-Risks Related to Our Business and Industry-The COVID-19 pandemic could adversely affect our business, financial condition and results of operations" in our 2022 10-K.
Key Factors Affecting Our Performance
Expansion of our Platform
We believe our platform is ideally suited for expansion across solutions, industries, and use cases. For example, in 2020, we entered the real-time conferencing market with the introduction of our Virtual and Hybrid Events, Webinars, and Online Learning products, focusing on learning, training, events, and marketing. In 2021 and 2022 we expanded the capabilities of our Virtual & Hybrid Events product to support a broader range of event types and use cases and fitted them to also address low-touch and self-serve sales, which we are developing and investing in. We believe these products present a significant long-term opportunity, and we intend to harness our growing presence with them. Additionally, we will continue to invest in new video products for training, communication and collaboration, sales, marketing, and customer care, as we extend our platform into more industries.
Acquiring New Customers
We are focused on continuing to grow the number of customers that use our solutions. Additionally, we are investing in low-touch and self-serve offerings that can be sold by inside-sales teams or completely online, as well as in distribution channels. We believe this will enable us to efficiently acquire smaller customers across all industries - beyond enterprises into SMEs, beyond universities into K-12 schools, beyond tier 1 media and telecom companies to tier 2 and 3 media and telecom companies, and beyond providing Media Services to large technology companies to also addressing smaller technology firms and startups.
Increasing Revenue from Existing Customers
We are focused on increasing sales within our existing customer base through increased usage of our platform and the cross-selling of additional products and solutions. For the three months endedMarch 31, 2023 , our Net Dollar Retention Rate was 102%. In order for us to increase revenue within our customer base, we will need to maintain engineering-level customer support and continue to introduce new products and features as well as innovative new use cases that are tailored to our customers' needs. 33
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Although we have invested significantly in our business to date, we believe that we still have a significant market opportunity ahead of us. We intend to continue to make investments to support the growth and expansion of our business and to increase revenue. We believe there is a significant opportunity to continue our growth. We expect that our cost of revenue and operating expenses will fluctuate over time.
Key Financial and Operating Metrics
We measure our business using both financial and operating metrics. We use these
metrics to assess the progress of our business, make decisions on where to
allocate capital, time, and technology investments, and assess the near-term and
long-term performance of our business. The key financial and operating metrics
we use are:
Three Months Ended March 31,
2023 2022
(in thousands)
Annualized Recurring Revenue $ 159,582 $ 147,705
Net Dollar Retention Rate 102 % 107 %
Remaining Performance Obligations $ 167,425 $ 171,223
Annualized Recurring Revenue
We use Annualized Recurring Revenue ("ARR") as a measure of our revenue trend
and an indicator of our future revenue opportunity from existing recurring
customer contracts. We calculate ARR by annualizing our recurring revenue for
the most recently completed fiscal quarter. Recurring revenues are generated
from SaaS and PaaS subscriptions, as well as term licenses for software
installed on the customer's premises ("On-Prem"). For the SaaS and PaaS
components, we calculate ARR by annualizing the actual recurring revenue
recognized for the latest fiscal quarter. For the On-Prem components for which
revenue recognition is not ratable across the license term, we calculate ARR for
each contract by dividing the total contract value (excluding professional
services) as of the last day of the specified period by the number of days in
the contract term and then multiplying by 365. Recurring revenue excludes
revenue from one-time professional services and setup fees. ARR is not adjusted
for the impact of any known or projected future customer cancellations, upgrades
or downgrades, or price increases or decreases.
The amount of actual revenue that we recognize over any 12-month period is
likely to differ from ARR at the beginning of that period, sometimes
significantly. This may occur due to new bookings, cancellations, upgrades or
downgrades, pending renewals, professional services revenue, foreign exchange
rate fluctuations and acquisitions or divestitures. ARR should be viewed
independently of revenue as it is an operating metric and is not intended to be
a replacement or forecast of revenue. Our calculation of ARR may differ from
similarly titled metrics presented by other companies.
Net Dollar Retention Rate
Our Net Dollar Retention Rate, which we use to measure our success in retaining and growing recurring revenue from our existing customers, compares our recognized recurring revenue from a set of customers across comparable periods. We calculate our Net Dollar Retention Rate for a given period as the recognized recurring revenue from the latest reported fiscal quarter from the set of customers whose revenue existed in the reported fiscal quarter from the prior year (the numerator), divided by recognized recurring revenue from such customers for the same fiscal quarter in the prior year (denominator). For annual periods, we report Net Dollar Retention Rate as the arithmetic average of the Net Dollar Retention Rate for all fiscal quarters included in the period. We consider subdivisions of the same legal entity (for example, divisions of a parent company or separate campuses that are part of the same state university system) to be a single customer for purposes of calculating ourNet Dollar Retention Rate. Our calculation of Net Dollar Retention Rate for any fiscal period includes the positive recognized recurring revenue impacts of selling new services to existing customers and the negative recognized recurring revenue impacts of contraction and attrition among this set of customers. OurNet Dollar Retention Rate may fluctuate as a result of a number of factors, including the growing level of our revenue base, the level of penetration within our customer 34
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Remaining Performance Obligations
Remaining Performance Obligations represents the amount of contracted future revenue that has not yet been delivered, including both subscription and professional services revenues. Remaining Performance Obligations consists of both deferred revenue and contracted non-cancelable amounts that will be invoiced and recognized in future periods. As ofMarch 31, 2023 , our Remaining Performance Obligations was$167.4 million , which consists of both billed consideration in the amount of$51.5 million and unbilled consideration in the amount of$115.9 million that we expect to invoice and recognize in future periods. We expect to recognize 58% of our Remaining Performance Obligations as revenue over the next 12 months and the remainder thereafter, in each case, in accordance with our revenue recognition policy.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe that Adjusted EBITDA, a non-GAAP financial measure, is useful in evaluating the performance of our business.
We define EBITDA as net profit (loss) before interest expense, net, provision for income taxes and depreciation and amortization expenses. Adjusted EBITDA is defined as EBITDA (as defined above), adjusted for the impact of certain non-cash and other items that we believe are not indicative of our core operating performance, such as non-cash stock-based compensation expenses, facility exit and transition costs and restructuring charges. Adjusted EBITDA is a supplemental measure of our performance, is not defined by or presented in accordance with GAAP, and should not be considered in isolation or as an alternative to net profit (loss) or any other performance measure prepared in accordance with GAAP. Adjusted EBITDA is presented because we believe that it provides useful supplemental information to investors and analysts regarding our operating performance and is frequently used by these parties in evaluating companies in our industry. By presenting Adjusted EBITDA, we provide a basis for comparison of our business operations between periods by excluding items that we do not believe are indicative of our core operating performance. We believe that investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. Additionally, our management uses Adjusted EBITDA as a supplemental measure of our performance because it assists us in comparing the operating performance of our business on a consistent basis between periods, as described above.
Although we use EBITDA and Adjusted EBITDA, as described above, EBITDA and Adjusted EBITDA, have significant limitations as analytical tools. Some of these limitations include:
•such measures do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
•such measures do not reflect changes in, or cash requirements for, our working capital needs;
•such measures do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
•such measures do not reflect our tax expense or the cash requirements to pay our taxes;
•although depreciation and amortization expense and non-cash stock-based compensation expense are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and such measures do not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate such measures differently than we do, thereby further limiting their usefulness as comparative measures.
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Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as
measures of discretionary cash available to us to invest in the growth of our
business. We compensate for these limitations by relying primarily on our GAAP
results and using these non-GAAP measures only supplementally. Adjusted EBITDA
includes an adjustment for non-cash stock-based compensation expenses. It is
reasonable to expect that this item will occur in future periods. However, we
believe this adjustment is appropriate because the amount recognized can vary
significantly from period to period, does not directly relate to the ongoing
operations of our business, and complicates comparisons of our internal
operating results between periods and with the operating results of other
companies over time. Each of the normal recurring adjustments and other
adjustments described above help to provide management with a measure of our
core operating performance over time by removing items that are not related to
day-to-day operations. Nevertheless, because of the limitations described above,
management does not view EBITDA, or Adjusted EBITDA in isolation and also uses
other measures, such as revenue, operating loss, and net loss, to measure
operating performance.
The following table reconciles EBITDA and Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net loss:
Three Months Ended March 31,
2023 2022
(in thousands)
Net loss $ (12,795) $ (16,926)
Financial expenses (income), net (a) (1,785) 182
Provision for income taxes 2,620 2,086
Depreciation and amortization 1,009 615
EBITDA (10,951) (14,043)
Non-cash stock-based compensation expense 7,159 5,684
Facility exit and transition costs (b) 154 - Restructuring (c) 945 - Adjusted EBITDA$ (2,693) $ (8,359) (a)The three months endedMarch 31, 2023 and 2022, include$803 and$498 , respectively, of interest expenses. (b)Facility exit and transition costs for the three months endedMarch 31, 2023 include losses from sale of fixed assets and other costs associated with moving to our temporary office inIsrael .
(c)The three months ended
Components of Our Results of Operations
Revenue
Subscriptions
Our revenues are mainly comprised of revenue from SaaS and PaaS subscriptions.
SaaS and PaaS subscriptions provide access to our Video Experience Cloud which
powers all types of video experiences: live, real-time, and on-demand video. We
provide access to our platform either as a cloud-based service, which represent
most of our SaaS and PaaS subscriptions, or, less commonly, as a term license to
software installed on the customer's premises. Revenue from SaaS and PaaS
subscriptions is recognized ratably over the time of the subscription, beginning
from the date on which the customer is granted access to our Video Experience
Cloud. Revenue from the sale of a term license is recognized at a point in time
in which the license is delivered to the customer. Revenue from post-contract
services ("PCS") included in On-Prem deals is recognized ratably over the period
of the PCS.
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Professional Services
Our revenue also includes professional services, which consist of consulting, integration and customization services, technical solution services and training related to our video experience. In some of our arrangements, professional services are accounted for as a separate performance obligation, and revenue is recognized upon rendering of the service. In some of our SaaS and PaaS subscriptions, we determined that the professional services are solely set up activities that do not transfer goods or services to the customer and therefore are not accounted for as a separate performance obligation and are recognized ratably over the time of the subscription.
Cost of Revenue
Cost of subscription revenue consists primarily of employee-related costs including payroll, benefits and stock-based compensation expense for operations and customer support teams, costs of cloud hosting providers and other third-party service providers, amortization of capitalized software development costs and acquired technology and allocated overhead costs. Cost of professional services consists primarily of personnel costs of our professional services organization, including payroll, benefits, and stock-based compensation expense, allocated overhead costs and other third-party service providers. The costs associated with providing professional services are significantly higher as a percentage of related revenue than the costs associated with delivering our subscriptions due to the labor costs of providing professional services. As such, the implementation and professional services costs relating to an arrangement with a new customer are more significant than the costs to renew an existing customer's license and support arrangement. Cost of revenue increased in absolute dollars from the three months endedMarch 31, 2022 to the three months endedMarch 31, 2023 . For the three months endedMarch 31, 2022 and 2023, our cost of revenue was$15,446 , and$15,987 , respectively. Gross Margins Gross margins have been and will continue to be affected by a variety of factors, including the average sales price of our products and services, volume growth, the mix of revenue between SaaS and PaaS subscriptions, software licenses, maintenance and support and professional services, onboarding of new media and telecom customers, hosting of major virtual events and changes in cloud infrastructure and personnel costs. In particular, the gross margins in our M&T segment have been negatively impacted due to the resources required for implementation of our TV Solution and Media Services for TV experiences, which generally exceed those of our other offerings, resulting in a longer period from initial booking to go-live and a higher proportion of professional services revenue as a percentage of overall revenue. Additionally, a higher proportion of revenue comes from customers who choose to license our offerings through private cloud and on-premise deployments, which also impacts our gross margin. In the long-term, we expect the margins for this segment to improve due to the following: expected increase in the ratio of subscription revenue to professional services with scale, improved efficiencies of both production and professional services costs, and an increase in the proportion of revenues from media customers, which generally entail simpler deployments compared to telecom customers. However, in the near and medium term, our gross margins in our M&T segment will vary from period to period based on the onboarding of new customers, as well as the timing and aggregate usage of our solutions by such customers. For the three months endedMarch 31, 2023 and 2022, our gross margins were 63% (72% for subscriptions and (67)% for professional services) and 63% (74% for subscriptions and (23)% for professional services), respectively. For our EE&T segment, gross margins for the three months endedMarch 31, 2023 and 2022 were 73% (78% for subscriptions and (40)% for professional services) and 70% (78% for subscriptions and (35)% for professional services), respectively. 37 -------------------------------------------------------------------------------- Table of Contents For our M&T segment, gross margins for the three months endedMarch 31, 2023 and 2022 were 38% (56% for subscriptions and (95)% for professional services) and 46% (62% for subscriptions and (13)% for professional services), respectively.
Research and Development
Our research and development expenses consist primarily of costs incurred for personnel-related expenses for our technical staff, including salaries and other direct personnel-related costs. Additional expenses include consulting and professional fees for third-party development resources and software subscriptions. We expect our research and development expenses to decrease in both absolute dollars and as a percentage of revenue for the near and medium-term, as we implement our Reorganization Plans, improving efficiency and productivity while further dedicating substantial resources to develop, improve, and expand the functionality of our solutions. Subsequent costs incurred for the development of future upgrades and enhancements, which are expected to result in additional functionality, may qualify for capitalization under internal-use software and therefore may cause research and development expenses to fluctuate.
Sales and Marketing Expenses
Our sales and marketing expenses consist primarily of personnel related costs for our sales and marketing functions, including salaries and other direct personnel-related costs. Additional expenses include marketing program costs and amortization of acquired customer relationships intangible assets. We expect our sales and marketing expenses to decrease both on an absolute dollar basis and as a percentage of revenue for the near and medium-term, as we implement our Reorganization Plans, improving efficiency and productivity while we continue our focused investment to support our growth.
General and Administrative Expenses
Our general and administrative expenses consist primarily of personnel-related costs for our executive, finance, human resources, information technology, and legal functions, including salaries and other direct personnel-related costs. We expect our general and administrative expenses to be relatively stable both on an absolute dollar basis and as a percentage of revenue for the near and medium-term, as a combined result of implementation of our Reorganization Plans and focused investment to support our growth.
We allocate overhead costs such as rent, utilities, and supplies to all departments based on relative headcount to each operating expense category.
Financial Expenses (Income), Net
Financial expenses (income), net consists of interest expense accrued or paid on our indebtedness and the change in the fair value of warrants to purchase our preferred and common stock in the comparative period, net of interest income earned on our cash balances and marketable securities. Financial expenses, net also includes foreign exchange gains and losses and bank fees. We expect interest expenses to vary each reporting period depending on the amount of outstanding indebtedness and prevailing interest rates. We expect interest income will vary in each reporting period depending on our average cash and marketable securities balances during the period and applicable interest rates. Provision for Income Taxes We are subject to taxes inthe United States as well as other tax jurisdictions or countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to currentU.S. income tax. Due to cumulative losses, we maintain a valuation allowance against our deferred tax assets. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets. Realization of ourU.S. deferred tax assets depends upon future earnings, the timing and amount of which are uncertain. Our effective tax rate is affected by tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions, as well as non-deductible expenses, such as share-based compensation, and changes in our valuation allowance. 38
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Results of Operations
The following tables summarize key components of our results of operations for
the periods presented. The period-to-period comparisons of our historical
results are not necessarily indicative of the results that may be expected in
the future.
Three Months Ended March 31, Period-over-Period Change
2023 2022 Dollar Percentage
(in thousands, except percentages)
Revenue:
Enterprise, Education & Technology $ 31,330 $ 29,727 $ 1,603 5 %
Media & Telecom 11,943 11,988 (45) 0 %
Total revenue 43,273 41,715 1,558 4 %
Cost of revenue 15,987 15,446 541 4 %
Total gross profit 27,286 26,269 1,017 4 %
Operating expenses:
Research and development expenses 14,130 14,873 (743) (5) %
Sales and marketing expenses 12,071 14,616 (2,545) (17) %
General and administrative expenses 12,100 11,438 662 6 %
Restructuring 945 - 945
Total operating expenses 39,246 40,927 (1,681) (4) %
Loss from operations 11,960 14,658 (2,698) (18) %
Financial expenses (income), net (1,785) 182 (1,967) (1081) %
Loss before provision for income taxes 10,175 14,840 (4,665) (31) %
Provision for income taxes 2,620 2,086 534 26 %
Net loss $ 12,795 $ 16,926 $ (4,131) (24) %
Segments
We manage and report operating results through two reportable segments:
•Enterprise, Education & Technology (72% and 71% of revenue for the three months endedMarch 31, 2023 and 2022, respectively): Our EE&T segment represents revenues from all of our products, industry solutions for education customers, and Media Services (except for M&T customers), as well as associated professional services for those offerings. •Media & Telecom (28% and 29% of revenue for the three months endedMarch 31, 2023 and 2022, respectively): Our M&T segment primarily represents revenues from our TV Solution and Media Services sold to media and telecom customers.
Comparison of the three months ended
Enterprise, Education & Technology
The following table presents our EE&T segment revenue and gross profit (loss) for the periods indicated:
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Three Months Ended March 31, Period-over-Period Change
2023 2022 Dollar Percentage
(in thousands, except percentages)
Enterprise, Education & Technology revenue:
Subscription revenue $ 29,874 $ 27,602 $ 2,272 8 %
Professional services revenue 1,456 2,125 (669) (31) %
Total Enterprise, Education & Technology $ 31,330 $ 29,727 $ 1,603 5 %
revenue
Enterprise, Education & Technology gross profit: Subscription gross profit$ 23,373 $ 21,520 $ 1,853 9 % Professional services gross loss (584) (754) 170 (23) % Total Enterprise, Education & Technology$ 22,789 $ 20,766 $ 2,023 10 %
gross profit
Enterprise, Education & Technology Revenue
Total EE&T revenue increased by$1.6 million , or 5%, to$31.3 million for the three months endedMarch 31, 2023 , from$29.7 million for the three months endedMarch 31, 2022 . This increase was due to a$2.2 million increase in revenue from new customers, partially offset by a$0.6 million decrease in revenue from existing customers. EE&T subscription revenue increased by$2.3 million , or 8%, to$29.9 million for the three months endedMarch 31, 2023 , from$27.6 million for the three months endedMarch 31, 2022 . EE&T professional services revenue decreased by$0.7 million , or 31%, to$1.5 million for the three months endedMarch 31, 2023 , from$2.1 million for the three months endedMarch 31, 2022 . The decrease was mainly due to fewer large-scale virtual events of the type that typically require substantial professional services as well as the impact of our shift towards a low-touch products/platform that require fewer professional services.
Enterprise, Education & Technology Gross Profit
Total EE&T gross profit increased by$2.0 million , or 10%, to$22.8 million for the three months endedMarch 31, 2023 , from$20.8 million for the three months endedMarch 31, 2022 . This increase was mainly due to a$1.6 million increase in revenue, and a 3 percentage point increase in gross margin to 73% for the three months endedMarch 31, 2023 from 70% for the three months endedMarch 31, 2022 . The increase in gross margin was attributable primarily to an increased proportion of subscription revenue of total EE&T revenue and a decrease in cloud-related costs driven by higher efficiency in our cloud infrastructure.
EE&T subscription gross profit increased by
EE&T professional services gross loss decreased by$0.2 million , or 23%, to a gross loss of$0.6 million for the three months endedMarch 31, 2023 , from a gross loss of$0.8 million for the three months endedMarch 31, 2022 .
Media & Telecom
The following table presents our M&T segment revenue and gross profit for the periods indicated:
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Three Months Ended March 31, Period-over-Period Change
2023 2022 Dollar Percentage
(in thousands, except percentages)
Media & Telecom revenue:
Subscription revenue $ 10,518 $ 9,415 $ 1,103 12 %
Professional services revenue 1,425 2,573 (1,148) (45) %
Total Media & Telecom revenue $ 11,943 $ 11,988 $ (45) 0 %
Media & Telecom gross profit:
Subscription gross profit$ 5,852 $ 5,846 $ 6 0 % Professional services gross loss (1,355) (343) (1,012) 295 % Total Media & Telecom gross profit$ 4,497 $ 5,503 $ (1,006) (18) %
Media & Telecom Revenue
M&T subscription revenue increased by$1.1 million , or 12%, to$10.5 million for the three months endedMarch 31, 2023 , from$9.4 million for the three months endedMarch 31, 2022 . The increase in subscription revenue was mainly derived from ramp-up of new customers and organic growth from existing customers. M&T professional services revenue decreased by$1.1 million , or 45%, to$1.4 million for the three months endedMarch 31, 2023 , from$2.6 million for the three months endedMarch 31, 2022 .
Media & Telecom Gross Profit
Total M&T gross profit decreased by$1.0 million , or 18%, to$4.5 million for the three months endedMarch 31, 2023 , from$5.5 million for the three months endedMarch 31, 2022 . This decrease was mainly due to an 8 percentage point decrease in gross margin to 38% for the three months endedMarch 31, 2023 from 46% for the three months endedMarch 31, 2022 . The decrease in gross margin was attributable primarily to inception of depreciation of an internal-use software asset and the increase in production cost as a percentage of subscription revenue. M&T professional services gross loss increased by$1.0 million , or 295%, to$1.4 million for the three months endedMarch 31, 2023 , from$0.3 million for the three months endedMarch 31, 2022 mainly due to lower revenue.
Operating Expenses
Research and Development expenses
Three Months Ended March 31, Period-over-Period Change
2023 2022 Dollar Percentage
(in thousands, except percentages)
Employee compensation $ 10,152 $ 11,391 $ (1,239) (11) %
Subcontractors and consultants 1,551 1,270 281 22 %
IT related 1,715 1,482 233 16 %
Other 712 730 (18) (2) %
Total research and development expenses $ 14,130 $ 14,873 $ (743) (5) %
41-------------------------------------------------------------------------------- Table of Contents Research and development expenses decreased by$0.7 million , or 5%, to$14.1 million for the three months endedMarch 31, 2023 , from$14.9 million for the three months endedMarch 31, 2022 . The decrease was primarily due to a$1.2 million decrease in compensation expenses, which mainly related to lower headcount as a result of our Reorganization Plans, partially offset by a$0.2 million increase in IT related expenses and$0.3 million increase in subcontractors and consultants expenses. Sales and Marketing expenses Three Months Ended March 31, Period-over-Period Change 2023 2022 Dollar Percentage (in thousands, except percentages) Employee compensation & commission$ 10,134 $ 12,061 $ (1,927) (16) % Marketing expenses 625 1,294 (669) (52) % Travel and entertainment 381 189 192 102 % Other 931 1,072 (141) (13) % Total sales and marketing expenses$ 12,071 $ 14,616 $ (2,545) (17) % Sales and marketing expenses decreased by$2.5 million , or 17%, to$12.1 million for the three months endedMarch 31, 2023 , from$14.6 million for the three months endedMarch 31, 2022 . The decrease was primarily due to a$1.9 million decrease in compensation related to lower headcount as result of our Reorganization Plans and a$0.7 million decrease related to marketing expenses due to cost reduction measures, partially offset by a$0.1 million increase in amortization of deferred commission expenses driven by higher accumulated bookings.
General and Administrative expenses
Three Months Ended March 31, Period-over-Period Change
2023 2022 Dollar Percentage
(in thousands, except percentages)
Employee compensation $ 9,038 $ 8,083 $ 955 12 %
Professional fees and insurance 1,110 1,638 (528) (32) % Subcontractors and consultants 365 280 85 30 % Travel and entertainment 153 65 88 135 % Other 1,434 1,372 62 5 %
Total general and administrative expenses
662 6 %
General and administrative expenses increased by $0.7 million , or 6%, to $12.1
million for the three months ended March 31, 2023 , from $11.4 million for the
three months ended March 31, 2022 . The increase was primarily due to $1.0
million in increased stock-based compensation expenses mainly as result of new
grants to our executives, partially offset by a $0.5 million decrease in
professional fees and insurance mainly as a result of lower insurance costs.
Restructuring
Restructuring expenses were$0.9 million for the three months endedMarch 31, 2023 , due to the 2023 Reorganization Plan and consisted of employee severance and related costs.
See Note 18 to our condensed consolidated financial statements for additional details regarding the 2023 Reorganization Plan.
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Financial Expenses (Income), net
Financial expenses (income), net decreased by$2.0 million , or 1081%, to$1.8 million income for the three months endedMarch 31, 2023 , from$0.2 million expense for the three months endedMarch 31, 2022 . The decrease was primarily due to a$1.7 million decrease related to exchange rate differences.
Provision for Income Taxes
Provision for income taxes increased by$0.5 million , or 26%, to$2.6 million for the three months endedMarch 31, 2023 , from$2.1 million for the three months endedMarch 31, 2022 , primarily due to increased tax liability related to income generated by our subsidiaries organized under the laws ofIsrael and theUnited Kingdom .
Liquidity and Capital Resources
Overview
Since our inception, we have financed our operations primarily through net cash provided by operating activities, equity issuances, and borrowings under our long-term debt arrangements. Our primary requirements for liquidity and capital are to finance working capital, capital expenditures and general corporate purposes. Our principal sources of liquidity are expected to be our cash on hand and borrowings available under our Revolving Credit Facility (as defined herein). DuringDecember 2021 , we repaid in full the outstanding principal balance under our Revolving Credit Facility. Therefore, as ofMarch 31, 2023 , we had no balance outstanding under the Revolving Credit Facility and the total revolving commitment of$35.0 million is available for future borrowings. We believe that our net cash provided by operating activities, cash on hand, and availability under our Revolving Credit Facility will be adequate to meet our operating, investing, and financing needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our revenue growth, the timing and extent of investments to support such growth, the expansion of sales and marketing activities, increases in general and administrative costs and many other factors as described under Part I, Item 1A. "Risk Factors" of our 2022 10-K, Part II, Item 1A. "Risk Factors" of this Quarterly Report on Form 10-Q and "-Key Factors Affecting Our Performance." In addition, our cash and cash equivalents are maintained at financial institutions in amounts that exceed federally insured limits. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we will be able to access uninsured funds in a timely manner or at all. If necessary, we may borrow funds under our Revolving Credit Facility to finance our liquidity requirements, subject to customary borrowing conditions. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. In particular, the widespread pandemic related to COVID-19 and its variants, the ongoing conflict betweenRussia andUkraine and rising inflation and interest rates have resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital. If we are unable to raise additional funds when desired, our business, financial condition and results of operations could be adversely affected.
Credit Facilities
InJanuary 2021 , we entered into a new credit agreement (as amended, the "Credit Agreement") with one of our existing lenders, which provides for a new senior secured term loan facility in the aggregate principal amount of$40.0 million (the "Term Loan Facility") and a new senior secured revolving credit facility in the aggregate principal amount of$10.0 million (the "Revolving Credit Facility" and, together with the Term Loan Facility, the "Credit Facilities"). InJune 2021 , we entered into an amendment to the Credit Agreement (the "First Amendment") to, among other things, increase commitments under the Revolving Credit Facility to$35.0 million , and make certain other changes to certain covenants and definitions. The amount available for borrowing under the Revolving Credit Facility is limited to a borrowing base, which is equal to the product of (a) 800% (which will automatically reduce to 350% on the date the Term Loan Facility is repaid in full), multiplied by (b) monthly Recurring Revenue for the most recently ended monthly period, multiplied by (c) the Retention Rate (in each case, as defined in the Credit Agreement). The Revolving Credit Facility includes a sub-facility for letters of credit in the aggregate availability amount of$10.0 million and a swingline sub-facility in the aggregate availability amount of$5.0 million , each of which reduces borrowing availability under the Revolving Credit Facility. 43 -------------------------------------------------------------------------------- Table of Contents Borrowings under the Credit Facilities are subject to interest, determined as follows: (a) Eurodollar loans accrue interest at a rate per annum equal to the Eurodollar rate determined for such day plus a margin of 3.50% (the Eurodollar rate is calculated as described in the Credit Agreement, subject to a 1.00% floor, divided by 1.00 minus the maximum effective reserve percentage for Euro currency funding), and (b) Alternate Base Rate ("ABR") loans accrue interest at a rate per annum equal to the ABR plus a margin of 2.50% (ABR is equal to the highest of (i) the prime rate and (ii) the Federal Funds Effective Rate plus 0.50%, subject to a 2.00% floor). In addition to paying interest on the principal amounts outstanding under the Credit Facilities, we are required to pay a commitment fee under the Revolving Credit Facility on unused amounts at a rate of 0.25% per annum. We are also required to pay customary letter of credit and agency fees. We are required to prepay amounts outstanding under the Term Loan Facility with 100% of the net cash proceeds of any indebtedness incurred by us or any of our subsidiaries other than certain permitted indebtedness. In addition, we are required to prepay amounts outstanding under the Credit Facilities with the net cash proceeds of any Asset Sale or Recovery Event (each as defined in the Credit Agreement), subject to certain limited reinvestment rights. Amounts outstanding under the Credit Facilities may be voluntarily prepaid at any time and from time to time, in whole or in part, without premium or penalty. All voluntary prepayments (other than ABR loans borrowed under the Revolving Credit Facility) must be accompanied by accrued and unpaid interest on the principal amount being prepaid and customary "breakage" costs, if any, with respect to prepayments of Eurodollar loans. The Term Loan Facility is payable in consecutive quarterly installments on the last day of each fiscal quarter in an amount equal to (x)$250,000 for installments payable onApril 1, 2021 throughDecember 31, 2021 , (y)$750,000 for installments payable onMarch 31, 2022 throughDecember 31, 2022 , and (z)$1.5 million for installments payable on and afterMarch 31, 2023 . The remaining unpaid balance on the Term Loan Facility is due and payable onJanuary 14, 2024 , together with accrued and unpaid interest on the principal amount to be paid to, but excluding, the payment date. Borrowings under the Revolving Credit Facility do not amortize and are due and payable onJanuary 14, 2024 . Our obligations under the Credit Facilities are currently guaranteed byKaltura Europe Limited , and are required to be guaranteed by all of our future direct and indirect subsidiaries other than certain excluded subsidiaries and immaterial foreign subsidiaries. Our obligations and those ofKaltura Europe Limited are, and the obligations of any future guarantors are required to be, secured by a first priority lien on substantially all of our respective assets.
The Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict our ability, and the ability of our subsidiaries, to:
•create, issue, incur, assume, become liable in respect of or suffer to exist any debt or liens;
•consummate any merger, consolidation or amalgamation, or liquidate, wind up or dissolve, or dispose of all or substantially all of our or their respective property or business;
•dispose of property or, in the case of our subsidiaries, issue or sell any shares of such subsidiary's capital stock;
•repay, prepay, redeem, purchase, retire or defease subordinated debt;
•declare or pay dividends or make certain other restricted payments;
•make certain investments;
•enter into transactions with affiliates;
•enter into new lines of business; and
•make certain amendments to our or their respective organizational documents or certain material contracts.
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The Credit Agreement also contains certain financial covenants that require us
to maintain (i) a minimum amount of Annualized Recurring Revenue (as defined in
the Credit Agreement) as of the last day of each fiscal quarter (which minimum
amount increases through the fiscal quarter ending December 31, 2023 ) (the "ARR
Covenant"), and (ii) Liquidity (as defined in the Credit Agreement) of at least
$10 million as of the last day of any calendar month. We were in compliance with
these covenants as of March 31, 2023 .
The Credit Agreement also contains certain customary representations and
warranties and affirmative covenants, and certain reporting obligations. In
addition, the lenders under the Credit Facilities will be permitted to
accelerate all outstanding borrowings and other obligations, terminate
outstanding commitments and exercise other specified remedies upon the
occurrence of certain events of default (subject to certain grace periods and
exceptions), which include, among other things, payment defaults, breaches of
representations and warranties, covenant defaults, certain cross-defaults and
cross-accelerations to other indebtedness, certain events of bankruptcy and
insolvency, certain judgments and Change of Control events. "Change of Control"
is defined as (a) any "person" or "group" (as defined in Sections 13(d) and
14(d) of the Exchange Act) becoming the beneficial owner of 40% or more of the
ordinary voting power for the election of our directors, (b) during any 24-month
period, a majority of the members of our board of directors ceasing to be
composed of individuals (i) who were members thereof on the first day of such
period, (ii) whose election or nomination thereto was approved by individuals
referred to in the foregoing clause constituting at least a majority of such
board, or (iii) whose election or nomination thereto was approved by individuals
referred to in the foregoing clauses (i) and (ii) constituting at least a
majority of such board; or (c) at any time, if we cease to own and control 100%
of each class of outstanding capital stock of each guarantor free and clear of
all liens (other than certain permitted liens).
In December 2021 , we repaid in full the outstanding principal balance under our
Revolving Credit Facility. As of March 31, 2023 , we had no balance outstanding
under the Revolving Credit Facility and the total revolving commitment of $35.0
million remains available for future borrowings. As of March 31, 2023 , we had
approximately $34.4 million of borrowings outstanding under the Term Loan
Facility.
Cash Flows
The following table summarizes our cash flows for the periods presented:
Three Months Ended March 31,
2023 2022
(in thousands)
Net cash used in operating activities $ (7,432) $ (19,590)
Net cash provided by (used in) investing activities 5,080 (4,062)
Net cash used in financing activities (922) (759)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
195 -
Net decrease in cash, cash equivalents, and restricted cash
(3,079) (24,411)
Cash, cash equivalents, and restricted cash at beginning 45,833 144,371
of period
Cash, cash equivalents and restricted cash at end of
period $ 42,754 $ 119,960
Operating Activities
Net cash flows used in operating activities decreased by $12.2 million for the
three months ended March 31, 2023 , as compared to the three months ended March
31, 2022 .
45-------------------------------------------------------------------------------- Table of Contents Net cash used in operating activities of$7.4 million for three months endedMarch 31, 2023 , was primarily due to$12.8 million incremental net loss, adjusted for non-cash charges of$10.9 million , and net cash outflows of$5.4 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of$1.0 million , stock-based compensation expenses of$7.2 million , amortization of deferred contract acquisitions and fulfillment costs of$3.0 million partially offset by non-cash interest income, net of$0.2 million . The main drivers of net cash outflows were derived from the changes in operating assets and liabilities and were related to a decrease in deferred revenue of$9.6 million , increase in deferred contract acquisition and fulfillment cost of$1.6 million , decrease in trade payables of$1.5 million , an aggregate decrease in employees accruals, and accrued expenses and other liabilities of$2.4 million , an increase of$0.8 million in prepaid expenses and other current assets and other assets, noncurrent and net change in operating lease right of use assets and lease liabilities of$0.4 million , partially offset by a decrease in trade receivables of$10.6 million . Net cash used in operating activities of$19.6 million for the three months endedMarch 31, 2022 , was primarily due to$16.9 million incremental net loss, adjusted for non-cash charges of$8.8 million , and net cash outflows of$11.4 million due to changes in our operating assets and liabilities. Non-cash charges primarily consisted of depreciation and amortization of$0.6 million , stock-based compensation expenses of$5.7 million and amortization of deferred contract acquisitions and fulfillment costs of$2.4 million . The main drivers of net cash outflows were derived from the changes in operating assets and liabilities and were related to a decrease in deferred revenue of$3.1 million , increase of trade receivables of$2.3 million , increase of deferred contract acquisition and fulfillment cost of$1.7 million , decrease in trade payables of$1.5 million , an aggregate decrease in employees accruals and accrued expenses and other liabilities of$2.3 million and an increase of$0.6 million in prepaid expenses and other current assets and other assets, noncurrent.
Investing Activities
Net cash flows provided by investing activities increased by
Net cash provided by investing activities of$5.1 million for the three months endedMarch 31, 2023 was related to proceeds from maturities of marketable securities of$9.2 million , offset by purchases of marketable securities of$2.9 million ,$0.4 million of capitalized internal use software and$0.9 million of capital expenditures. Net cash used in investing activities of$4.1 million for the three months endedMarch 31, 2022 was related to$1.8 million of capitalized internal use software, investment in short-term deposit of$1.9 million and$0.4 million of capital expenditures. Financing Activities Net cash flows used in financing activities increased by$0.2 million for the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 .
Net cash used in financing activities of
Net cash used in financing activities of$0.8 million for the three months endedMarch 31, 2022 , was primarily due to repayment of long-term loans of$0.8 million , repayment of finance lease liabilities of$0.1 million , and payment of debt issuance costs of$0.1 million , offset by$0.2 million due to proceeds from the exercise of stock options. 46
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Contractual Obligations and Commitments
Our principal commitments consist of obligations under operating leases, purchase obligations with third-party providers for the use of cloud hosting and other services and outstanding debt. There were no material changes to our commitments and contractual obligations during the three months endedMarch 31, 2023 from the commitments and contractual obligations disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our 2022 10-K. For further information on our commitments and contractual obligations, refer to Note 7, Note 8 and Note 14 of the notes to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances, including the anticipated impact of COVID-19 and macroeconomic uncertainty, including due to theRussia -Ukraine conflict, rising interest rates and inflation. As events continue to evolve and additional information becomes available, our estimates and assumptions may change materially in future periods. Our critical accounting policies and estimates were disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our 2022 10-K. There have been no significant changes to these policies and estimates during the three months endedMarch 31, 2023 .
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