Kaltura Inc (KLTR) 2021 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Kaltura second-quarter 2021 earnings call. This call is being simultaneously webcast on the Company's website in the Investors section under Events. For opening remarks and introductions, I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

Thank you, and good morning. With me today from Kaltura are Ron Yekutiel, Co-Founder, Chairman and Chief Executive Officer; and Yaron Garmazi, Chief Financial Officer. Ron will begin with a brief review of the business results for the second quarter ended June 30, 2021, and an overview of Kaltura. Yaron will then review the financial results for the second quarter, followed by the Company's outlook for the third quarter and full year of 2021. We will then open the call for questions.

Please note this call will include forward-looking statements within the meaning of the federal securities laws, including but not limited to statements regarding Kaltura's future financial results and management's expectations and plans for the business. These statements are neither promises nor guarantees and involve risk and uncertainties that may cause actual results to differ materially from those discussed here. Additional information that could cause actual results to differ from forward-looking statements can be found in the risk factors section of Kaltura's prospectus filed with the SEC on July 22, 2021, pursuant to Rule 424(b) and other periodic SEC filings, including the quarterly report on Form 10-Q for the period ended June 30, 2021, 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. All material contained in the webcast is the sole property and copyright of Kaltura with all rights reserved.

Please note, this presentation describes the non-GAAP measure adjusted EBITDA, which is not prepared in accordance with US GAAP. For a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP metric, please refer to our earnings release. Now I'd like to turn the call over to Ron, Co-Founder, Chairman and Chief Executive Officer.

Thank you, Erica, and thanks to everyone for joining us on the call this morning. We're excited to report our first quarter as a public company. I want to start off this special call with a few quick acknowledgments and thanks.

First, to our amazing team, employees, partners and long-time shareholders, or as we call ourselves, Kalturians, for always dreaming big, for your unwavering dedication, passion and resilience and for your steadfast commitment for our founding values of openness, flexibility and collaboration.

Second, to our loyal customers, for your partnership, trust and support. We look forward to continuing to videofy the world with you. As they say in the Olympics: faster, higher and stronger together.

And lastly, most importantly, to our new shareholders. Thank you for your vote of confidence. We're excited to have you join our extended family. Our journey to Power any Video Experience, for any Organization has only just begun. We are all energized and thrilled to enter this new chapter and strongly believe that the best is very much ahead of us.

I will start this morning with just a few opening financial highlights from the second quarter. Then because it is our first earnings call, I want to take some time to provide an overview of our business and market opportunity, as many of you may be new to the Kaltura story. After which, I will provide more details on the passing quarter and the road ahead.

We reported a very strong second quarter fueled by robust bookings, sales force productivity and net dollar retention rate. Our revenue for the quarter was $41.6 million, up 45% year over year. Subscription revenue for the quarter reached $36.5 million, an increase of 46% from the prior year and represented 88% of total revenue. Our annual recurring revenue run rate grew to $145.4 million, up 46% year over year. And our net dollar retention rate continued to increase to 121%, up from 105% one year ago.

We're very excited about the results of the passing quarter, but before I share more details about it and the road ahead, for the benefit of those who are new to Kaltura, I want to quickly provide a summary of our business and why we believe the best is yet to come.

If you participated in major virtual events in the passing year, it was possibly conducted using Kaltura. If you are studying in a university or have graduated from one in the last decade, you may have used Kaltura when you created or consumed videos in class or remotely. If you work at any large organization, you also possibly watched internal videos and town halls and have engaged your customers with videos using Kaltura. If you are a TV subscriber of a major PPV provider like Vodafone, you may have also watched your favorite series using Kaltura. Video is everywhere and increasingly so is Kaltura.

We started Kaltura in 2006 when online video was just in its infancy and embarked on a mission to build a single, open and flexible platform that would Power any Video Experience, for any Organization. Over the years, we've built a robust Video Experience Cloud that includes live, real-time and on-demand video products, solutions and developer tools for organizations that drive today communication, collaboration, learning and entertainment for many millions of people at home, work and school.

More specifically, we are recognized as the leading vendor in the enterprise video content management market, offering a broad set of products and capabilities for on-demand and live both for web and TV solutions. And in 2020, we expanded into the real-time conferencing space focusing primarily on experiences that require both real-time conferencing as well as advanced live and on-demand content management capabilities.

Our Video Experience Cloud today is comprised of the following three components. First, a set of media services that includes hundreds of video APIs for on-demand, live and real-time video developer tools and video and TV content management systems. We license these media services to tech companies that want to add video workflows to their own products.

We also build all of our own products and solutions at Kaltura on top of these same media services and APIs, which make all of our offerings very flexible, interoperable and easy to customize and integrate with, avoiding traditional silos and redundancies. This modularity also fuels a rapid pace of innovation.

Second, on-demand, live and real-time video products that cater to all industries, powering both the internal video needs of organizations with their employees as well as their external needs with their customers, partners and prospects. Our products include a video portal, a system for townhalls, a system for sending video messages. And ever since we've added real-time conferencing last year, also offerings for webinars and virtual events.

Third, the industry-specific video solutions currently catering to two markets: education and media and telecom. We offer video solutions that power in-class and remote teaching and learning for education institutions. This includes a video extension for all popular learning management systems, a lecture capture solution to record or stream live lectures, and starting from 2020, also a virtual classroom solution for remote and hybrid teaching and learning. We also offer media and telecommunications companies a platform to launch and manage their cloud-based over-the-top TV service, including live, on-demand and catch-up TV, both subscription-based and ad-based.

As of June 30, 2021, we have over 1,000 customers across four markets. Three of them, enterprise, education and technology, are reported together as a unified segment and the fourth, media and telecom, is reported as the second separate segment. Among these customers are 25 of the US Fortune 100; more than 50% of the top US research educational institutions, including seven of the eight Ivy League schools; and we power more than 50 major cloud TV initiatives for large media and telecom companies around the world. We sell our solutions primarily through direct sales teams and account teams that are also organized based on these four customer markets.

To date, we have invested primarily in increasing the scope and depth of our offering. At the same time, we have accelerated our year-over-year revenue growth from 12% in 2018 to 18% in 2019 and 24% in 2020; and from 17% in the first quarter of 2020 to 46% in the first quarter of 2021 and now 45% for the second quarter of 2021, up from 21% in the second quarter of 2020.

We accomplished this acceleration without materially increasing our sales and marketing spend over 2019 and 2020. In the fourth quarter of 2020, we began investing significantly in sales and marketing expenses to drive revenue growth, and we expect this trend to continue for the foreseeable future.

Our revenue acceleration to date was achieved primarily through growing our sales efficiency and net dollar retention rate metrics. We estimate that during 2018, 2019, 2020 and the first quarter of 2021, the lifetime value of our customers exceeded 5, 7, 11 and again 11 times the cost of acquiring them. Our net dollar retention rate grew from 105% in 2019 to 107% in 2020 to 116% in the first quarter of 2021. And now in the second quarter of 2021, it continued growing to 121%.

The rise of both metrics are attributed to increased demand into a growing average ARR per customer, which is fueled by increased consumption levels and a growing number of offerings purchased by each customer. To that end, to date, half of our customers have purchased three or more of our offerings and used them for a range of use cases across organizations.

As we look into the future, all of us at Kaltura are more excited than ever. We're finally accelerating our investment in sales and marketing on the heels of established leadership across several large markets, attractive unit economics and proven operational efficiency. We only recently started commercializing our new and exciting products and solutions from 2020, including webinars, virtual events and virtual classrooms, and we plan to continue to create innovative products and solutions for our customers. We're also planning to go down-market and cater to smaller customers, including SMEs, with new self-serve and low-touch products for companies and developers and to do so with the support of new channel distribution partners. We have many growth drivers, and our opportunity is large and timely.

This brings me back to the second quarter of 2021. I would like to give you some more color on what we've done in the past quarter from a go-to-market and technology development perspective, what development we plan to do next and how we currently see our growth engines.

First from a go-to-market perspective, this was another great quarter. We once again saw strong traction, robust bookings and retention and an increase of our average ARR per customer. On the enterprise front, Kaltura continues to position itself as the go to platform for high-stakes virtual events. We sold our new Virtual Event product to large organizations, including Fortune 500 companies, and delivered major events around the world during the quarter, some including over 100,000 registrants. We also had initial virtual event customers renew their contracts and extend them for additional events.

While on the topic, I'm delighted to announce today the upcoming launch of a new Kaltura-led industry event in the field of virtual and hybrid events. It is called Virtually Live by Kaltura, and it will take place virtually this November 9. Virtually Live will focus on the transformation of live, virtual, unified and hybrid events and how they have changed forever, transforming the marketing funnel. We are expecting market peers, business leaders and market leaders to join us to reimagine how events would look like in the years to come. We will deliver the events on Kaltura's virtual event platform, which has hosted some of the tech industry's biggest events this year.

Beyond virtual events, video messaging continues to gain popularity in the enterprise markets with a major financial institution transitioning to video-based communication with its customers using our video messaging product. We're also seeing more global companies switch over to our virtual classroom solution from other virtual learning platforms, including one of the major consulting firms, and most of our customers continue to purchase multiple offerings, so all of our enterprise products remain very much in demand.

Education institutions are continuing to grow their dependence on video for learning both real-time and on-demand, and we are continuing to strengthen our position as the central media repository for educational institutions. Our tech customers that are embedding our media services in their own platforms have continued to grow their usage materially, and this remains the highest contributor to our net dollar retention rate.

In media and telecom, we continue to broaden the footprint of our Cloud TV Platform. This quarter, our long-time customer Vodafone launched their Kaltura-powered Vodafone TV service in Germany, their largest TV market. Also, in Q2, we closed an important deal to power cloud TV for a large telecom company in France.

Second, from a technology innovation perspective, we continued with our fast pace of innovation this past quarter across our live real-time and on-demand stacks with a focus of driving convergence across. On live, we finished migrating our customers to our newly built, modernized live-streaming cloud infrastructure that is based on a new powerful Kaltura live-streaming engine that provides broadcast-quality live playback, user engagement and real-time analytics and addresses growing scale in viewer concurrency and is ideally suited to power large high-stakes virtual events and the cloud TV initiatives.

We have also added a set of new capabilities to our Simulive experiences that allow our customers to prerecord content and simulate a live broadcast, relieving much of the stress that accompanies live production. Simulive has been in very high demand in past months, especially for virtual events of all types, and remains an important area of investment for us.

On VOD, we released a new Kaltura plug-in for Zoom customers, allowing hundreds of joint customers to better manage Zoom recordings on Kaltura. We upgraded management capabilities both within Kaltura and in Zoom and have automated certain flows for our education customers that use our video solutions for learning management systems.

On real-time conferencing, we upgraded our virtual classroom and webinar products with more advanced content management capabilities for breakout groups and also added interactive advanced functionalities for simple real-time polls.

I'd also like to highlight several new partners that have joined our tech partner marketplace, which includes more than 125 companies, further extending our core capabilities and adding value to customers. I'd like to welcome Be. Live, a live studio platform; Idomoo, an automated video personalization platform; and Pigeonhole, an advanced communication tool for virtual and hybrid events.

A few words about our plan for technology innovation going forward. On the media services side, we plan to continue and invest heavily in our real-time video infrastructure, which is the most recent addition to our technology stack. For the users of our on-demand experiences, we are investing in enhanced editing and personalization tools. We also started our journey towards hosting our platform on multiple clouds to facilitate strategic partnerships with several cloud players. Lastly, we are building the infrastructure for self-serve purchasing for our media services to cater beyond large tech customers, also to tech startups and to the broader developer community.

On the cross-industry product side, we plan to continue investing heavily in our Virtual Events platform and to combine our advanced branding capabilities that are ideally suited for bigger companies with more self-serve, templatized event management capabilities that are better suited for smaller companies and events. We will also utilize our infrastructure for self-serve purchasing to launch several self-serve products that cater to specific departments and also to SMEs.

For the education market as well as for learning and training use cases in the enterprise, we are building a new infrastructure to easily create and edit interactive personalized videos to facilitate personalized learning and engagement paths. And for media companies, we are putting together a more simplified end-to-end version of our robust offering for telcos designed to allow them to launch advertising or subscription-based direct-to-consumer services in a matter of weeks instead of months, including the same or even more features offered by global streaming services and without the need to procure individual tech stack components.

Third and last, how we currently see our growth engines. We are on track with increasing our S&M spend and ramping up new sales and customer success reps, who should start contributing in the second half of this year, and the average productivity of our sales team so far remains as planned. As discussed, we're seeing good traction and a growing demand for our new products and solution releases of 2020. We've made good progress in growing our R&D spend, and we're starting to develop a new set of products and solutions, including those that will enable us to go down-market and cater to smaller organizations.

In summary, another great quarter behind us across all of our markets and a strong outlook for the rest of the year. With that, I will turn it over to Yaron, our CFO, to discuss our financial results in more detail. Yaron?

Thank you, Ron, and good morning, everyone. As I review the second quarter results today, please note that I will be referring to non-GAAP metrics. Reconciliation of GAAP to non-GAAP financials, including today's earnings release, which is available on our website.

Given that this is our first call as a public company, I want to start sharing some perspectives about our business model, our financial profile. Then I will walk through highlights from our second quarter, and finally, I will close with a guidance for the third quarter and the full year before we open up the call for questions.

As Ron mentioned, we organized our business in two reportable segments: enterprise, education and technology or EET, and media and telecom or M&T. These segments share a common underlying platform consisting of our API-based architecture as well as unified product development, operation and administrative resources.

Our EET segment includes revenue from all our products, industry solutions for education customers and media services, except for media services and telecom customer, as well associated professional services for both offerings. Subscription revenue are primarily generated as a per full-time equivalent basis for on-demand and live products and solutions, per host basis for real-time and conferencing product and solutions, and participant basis for the Virtual Event product. Contracts are generally 12 to 24 months in length, and the average implementation time range from 3 to 6 months.

Our M&T segment includes revenue from the TV solution and media services for media and telecom customers as well as associated professional services for those offerings. Revenue are generated on an on per and subscribe basis for telecom customers, on a per-video play basis for media customers, contracts generally 2 to 5 years in length, and average implementation time is ranged from 9 to 12 months.

Generally speaking, our M&T solution requires greater upfront resources for implementation resulting in a longer period of initial booking to go live and higher proportion of professional services revenue as a percentage of overall revenue. Additionally, a higher proportion of revenue comprised private cloud and on-premise deployment, which is -- impact our gross margin. In the long term, we expect the gross margin for the M&T segment improve due to lower mix of professional service revenue, improved efficiency of both production and professional services cost and increase in the portion of revenue for media customer, which generally entail simpler deployments compared to telecom customers.

From a go-to-go market standpoint, large majority of revenue comes from existing customers with whom we are in active dialogue and tend to have a visibility into their expected usage of our offering. We focus our sales and the marketing efforts on large organization and sell our solutions primarily through direct sales team and accounts team. We currently have a direct sales team grouped by offering type of large customers, and we leverage our resale relationship globally to help market and sell our products to customers worldwide, especially in areas which we have a limited presence.

Moving to our quarterly financial results, total revenue for the second quarter ended June 30, 2021, was $41.6 million, up 45% year over year. Subscription revenue was $36.5 million, up 46% year over year. While professional services revenue contributed $5.1 million, up 36% year over year. Remaining performance obligation were $156.3 million, up 34% year over year, of which we expect to recognize 65% of the revenue over the next 12 months.

Annual recurring revenue was $145.4 million, up 46% year over year. Revenue benefited from a continued strong booking level and acceleration of net dollar retention rate, which was 121% in the second quarter compared to 105% in Q2 2020.

Within our EET segment, total revenue was $30.2 million, up 61% year over year. Subscription revenue was $27.2 million, up 53% year over year. While professional services revenue contributed $3 million, up 195% year over year. Within M&T segment, the total revenue was $11.4 million, 14% (sic - "14% higher") year over year. Subscription revenue was $9.3 million, up 28% year over year. While professional service revenue contributed $2.1 million, down 24% year over year.

Gross profit in the quarter was $26 million, representing a gross margin of 62%, which is equal to the gross margin of Q2 2020. R&D expenses was $11.8 million, 28% of revenue compared to 23% in Q2 2020. The increase was driven by additional headcount and payroll expenses, and we continue to invest in technology and innovation.

Sales and marketing expenses were $10.5 million, 25% of revenue compared to 23% in Q2 2020. This increase was driven by additional sales and marketing investments, including headcount and personnel-related expenses. We intend to continue to invest in sales and marketing as we expand our salesforce and marketing efforts to leverage our position in the market and to capture significant opportunity in front of us.

G&A expenses were $9.4 million or 23% of revenue compared to 13% in Q2 2020. G&A reflects an increase in headcount and payroll expenses. GAAP net loss in the quarter was $2.7 million or $0.37 per diluted share. Adjusted EBITDA was negative $1 million, decreasing from $3.3 million in Q2 2020. This result is in line with our plan to increase our spend in order to further fuel growth, as discussed earlier.

Turning to the balance sheet and cash flow, we ended the quarter with $29.8 million in cash and short-term investments. Net cash provided by operating activity was $0.9 million in the quarter.

I would now like to turn to the outlook for the third quarter and the full year of 2021. For the third quarter, we expect revenue of $41.5 million to $42.5 million, with a negative adjusted EBITDA of $6.5 million to $4.5 million. For the full year, we expect revenue of $162.5 million to $164.5 million, with a negative adjusted EBITDA of $17.8 million to $14.8 million.

In summary, our strong new business pipeline accelerated the net dollar retention rate. And after a long time also a significant increase of our sales and marketing resources will enable us to continue and support a robust recurring revenue growth rate. With that, we will open the call for questions. Operator?

(Operator instructions) Daniel Bartus, Bank of America.

Great. Congrats again on the IPO, and thanks for taking the question here. First, wanted to ask about the EET strength. It sounded like you're certainly seeing broad demand. But can you help us understand what's driving that strong growth a little bit more by maybe ranking which products are driving it most in 2Q there?

Sure, Dan. Thank you for joining and thank you, everybody else, for your time here again. Broadly, it's been a record new booking quarter for us. Previous record was Q1 2021. Strong contribution came across all markets. We had a similar contribution to bookings, by the way, between new logos and upsells.

For EET bookings specifically, a significant part of our deals in the first half of the year and the second quarter were for new products, virtual events, webinars, virtual classrooms. Along with town halls, the majority of our new business supported live and RTC experiences. So to remind you, this is something we started last year, and we are also -- the town hall had been there for a while but all the new ones have added, and now the fact that this is half of our business for EET is quite significant.

Our upsells were balanced between acquisition of more products in line with our multiproduct per customer approach, and we had also an increase in the number of licenses or in consumption usage; I'd say it was generally 50-50.

On a geo basis, again EET deals were mainly North America and M&T deals were mainly in EMEA. There's also an increase in the percent of bookings from channels, which we expect to see more throughout the year. One small, interesting note is that we started seeing a reduction as expected from the percent of professional services bookings from total bookings as both, by the way, in EE&T and in M&T, and that's because of what we expected to see as increased productization, and the trend is also starting to affect revenue impact as well.

ARPU remains strong like it was before. Pipeline remains strong. We're absolutely en route to having a great strong year. Maybe, Yaron, you want to add a bit how this affects revenue in EET and maybe also in M&T, go ahead.

Yes. Thank you, Ron. And Danny, thank you for joining for the question. Yes, obviously, as Ron mentioned, we see the growth coming across the board from all segments. By the way, it's not just in EE&T that is growing very nicely. We are not showing booking number, but I can tell you that also in the M&T, we saw a very significant booking momentum going into this quarter. Actually the booking that we had for this quarter was basically equal to the same booking that we had last year for this quarter. So down the year, you would probably see a very nice catch up in terms of the revenue coming also from this segment.

The other trend, which is very important, as Ron mentioned, is professional services as a percentage of revenue is going down so the acceleration that we see in revenue both in media and telecom and in enterprise, education and telco OEM is accelerating very nicely, especially in recurring revenue.

Maybe one couple last points is the fastest-growing revenue growing was tech OEM followed by enterprise, then edu, then media and telecom. And then lastly, Yaron was referring to media and telecom, was the only market that was growing under 30%. But as mentioned now, it's kind of rebounding because of significant booking and post-COVID for media and telecom, and so we expect that to pull off strongly into the future. Does that answer your question, Dan?

Yes, certainly. Yes, thanks for all that color, guys. And then just as a follow-up maybe for either of you, I wanted to ask about net retention rate a little bit because that's improving nicely here too. Just curious at a high level, with all your new products, where do you think the net retention rate could go from here? And maybe more specifically, Yaron, what do you have baked in your second half's guidance for net retention rate?

Yes, let me kick it off and then pass it over to Yaron. I will say a general statement about retention rate. So, first, in the second quarter, we had about a quarter of our yearly renewals and we had even better gross retention rates. We are not reporting on them but just to understand. And even Q1 and last year, Q2 last year, they continue to be best in class for the enterprise industry.

So unit churn is also very low similar to our dollar churn, and gross churn of our new 2020 cohorts of customers was not different than the other cohorts before. So a lot of what is fueling us forward is upsells but also bearing in mind that the gross retention is looking really, really good. Yaron, you want to talk about our net dollar retention? Go ahead.

Yes, a few more comments on the net dollar retention rate. So first of all, it was growing very nicely this quarter, as you mentioned, to 121% from 116% last quarter. Just to remind us, the 2 years before, it was 105% and 107%.

The growth and the acceleration, we see across the board. We are not breaking up, and we will not be providing guidance into the net dollar retention rate for the future, but I can tell you that we see the growth in usage in user is coming mostly from media and telecom and tech OEMs. Upsell from enterprise and education with the introduction of the new products is coming across the board, and we expect to see accelerating going forward.

We will not be sharing specific guidance for the numbers going forward for the net dollar retention rate, but I can tell you that the momentum that we see is very strong, and we feel comfortable on this number going into the next 2 quarters of the year.

Yes, one last comment I'd say is that we've reported on continued increase in the average revenue per customer. It grew by another 27% year over year, and that's fueled both by new and exciting and because of products that we're adding and people are upselling but also just by the nature of having multiple products per customer, that has always been the case. We've stated that half our customers are using three-plus products. That's continuing, so that's a strong strength. Thanks, Dan, for the questions.

Thanks, guys. Very helpful.

Michael Turrin, Wells Fargo Securities.

Q2 metrics continue to accelerate. The outlook you are providing does suggest a bit of a slowdown in terms of growth rate, especially heading into Q4. Is there any commentary you can provide around just the overall approach to guidance, how much conservativism, if any, is built into that second half outlook? I know Ron mentioned some of the investments you are making should start to ramp in the back half as well. I'm just wondering if those could present upside potential or just anything else you can provide in terms of the outlook and color around that.

Thank you, Mike. I will let Yaron start off, and maybe I will add a few points after. Go ahead, Yaron.

Yes, obviously you saw the guidance and the numbers that we have provided for the quarter. You are right that the second part of the year, there is a deceleration in the growth rate. By the way, it's much slower trend than what we expected to see. So numbers are better than what we expected in terms of the deceleration. The growth that we provided for this year is roughly 36% for the overall Company for the full year. We obviously started the 2 quarters with around 45%, so you can see that there is some kind of deceleration the second part of the year as we expected it to be.

But a few points that are very important. First of all, if you look on the blended between recurring and nonrecurring revenue that we had in Q4 last year, which impact the growth rate -- the basis for the growth rate of this year, you will see that a major part of the increase in Q4 last year was related to nonrecurring revenue. Actually, 18% of the revenue was nonrecurring.

If you look on the trend going into the first half of the year, right now, the nonrecurring revenue, the professional services revenue is just 13%. We believe that this trend will continue into the rest of the year. So basically, if you will do the math in terms of what's going to be the growth rate of the recurring revenue part of direct business, you will see that it's definitely not decelerating as the overall Company, and that it's going to get very close to the overall growth rate of the Company.

So if we take out of the equation the nonrecurring revenue, definitely the deceleration is much, much slower, smaller and it's way better than what we expected. And the main reason that it's way better is the booking and the churn rate that we faced during Q1 and Q2.

So to make a long story short, it's very important that you will look on the trend of the recurring revenue and it's definitely getting through the overall -- very close to the overall growth rate of the Company, which right now, as I mentioned, is in the 36%.

And the most important part, as Ron mentioned before, we are increasing the investment in sales and marketing. And the fruits of the new product that we are starting to see, as Ron mentioned, is very important. But, Ron, you can probably highlight more.

Sure, happy to do that, and thanks again for the question. So look, the expected slowdown in Q3 and Q4 was there all the way from the beginning. It's in [older] different models. It's mainly because we are comparing post-COVID versus post-COVID. Obviously, in the first half of the year, we got all the bumps from COVID, and as we advanced, that's affecting us.

But it's not just because of COVID, as you know for years, we've maintained our sales and marketing spend the same way, and the improvement was done mainly because of the improved efficiency. You remember the LTV to CAC went from 5 to 7 to 11, remained at 11. If it's not continuing to grow, then efficiencies are as is, and what you are waiting is for more salespeople to come around.

So this is what is starting to happen. We started increasing our number of salespeople at the end of last year, the beginning of this year. They are mainly coming up and ramping up in the second half of this year. And it's not just the time that it takes for them to ramp up, it's then the customers and then the gradual recognition of subscription revenue. So all of that is going to mainly contribute to 2022 into next year, and so that's quite significant.

Then if we look at the longer term, other than the next couple of quarters and other than the ramp up in salespeople that's the most important one, we expect the increase in activities with channels and strategic partners, which are going to support the growth we're seeing with the great traction of our new products.

And we just started scratching the surface with this, virtual events, webinars, virtual classrooms. As I mentioned earlier, they are a big part of what we are selling right now. It's just the beginning. And we are developing a new set of products and solutions, going down-market through self-serve and low touch, and that's going to enable us to go faster as well. So a lot of things fueling our growth. Go ahead, Yaron.

Yes. And one more main point regarding the guidance that we provided. Obviously, we provided a guidance that we believe for the rest of the quarter, but we will work very hard to try to beat those numbers.

That's great detail. Very helpful.

Matt Niknam, Deutsche Bank.

Congrats as well on the IPO. I had a question about demand. And I think, Ron, you may have alluded to this a little bit, but maybe if you can expound. We've heard some peers starting to talk about moderation or sort of rightsizing of demand in recent weeks, maybe as they start to lap some of the peak initial benefits from COVID last year. I'm just wondering if you can comment on whether you've seen anything similar across any of your core verticals. And then maybe as a follow-up there, with the proliferation of the Delta variant, I'm wondering if that's had any meaningful effect or change on customer demand in more recent weeks.

Thanks for the question, Matt. So we have not seen a slowdown in demand. One thing to remember for us as a Company, we are a very horizontal company, addressing a lot of different markets between enterprise, education, media and telecom, tech OEM, embedded all these different things; and also that we've not been one of these companies that have pumped up during COVID because of consumption and usage and have then come flying down.

If you remember last year, we spoke a lot about the fact that we have FTE-based pricing versus usage and the fact that the growth was not picked up by consumption. If any, our gross margins were pushed down because of that. So if any, what we're seeing is maybe slightly less consumption levels, which are starting to improve our gross margins. We can talk more about that. But we are not seeing in our pipeline a softening of the demand.

Because we have also all these new products that are very exciting that we started adding late last year, we are seeing a lot of demand for these products, which we didn't cater to before in the last few years. And so maybe it's hiding some undercurrent of what generally people want, but where we are in the market right now, we are seeing a lot of growth.

As for Delta, we don't see a lot of that impact, and I think the reason is that we are good either way. I mean, definitely we're supportive of remote work and of remote teaching and learning, but the underlying trends for which we power our customers have been there for the longest time, and they are continuing.

I am going to give you a couple of examples. In teaching and learning, it's not just about people sitting at home and learning, it's about the continued trend of what's called the flip classroom, where people might be coming back to school in order to do their homework together with their teachers and trainers, but they are going to stay home in order to listen to the lectures. And so we definitely see a lot of these trends continuing, and we are seeing strong renewals as well that's very encouraging.

In the last few weeks, there were a lot of renewals for virtual events for both virtual and hybrid. Even those that have been considering to have physical events are wanting to have back-to-back virtual events. And the reason for that is they see that as a life-long tool for engaging their customers and communities. It's replacing the historical way of doing marketing. So it's not just instead of the physical, it's an addition. So the short answer is, at this point, we are not seeing any softening. Does that address your question, Matt?

It does. And if I could just throw in one last follow-up. You talked about the potential for maybe some moderating consumption, which actually is a tailwind to your gross margins. And then also, in the commentary, you spoke a little bit about how professional services may be moving lower as a percent of total revenue. So collectively, those seem like dual tailwinds for profitability. I'm just wondering, I guess bigger picture, how does that, if at all, affect the -- maybe roadmap or visibility towards a return to profitability over the next couple of years?

Yes, maybe this is a good chance for Yaron to talk a bit about gross margin. I will also add a few things, but let's talk about gross margin. Go ahead, Yaron.

Yes, obviously you saw that gross margin for the quarter was 62%, which is grew -- it's even better than what we had in Q1 this year. If you look on some of the challenges that we saw in the beginning of the year or even the end of last year due to the fact that we had to move to our public cloud, all of it is behind us. So in many cases, we came back all the way to the gross margin that we had before COVID. We saw it both in enterprise, education and tech OEM and also in media and telecom. Actually in media and telecom, we see a very nice improvement in gross margin even in the most significant phase going forward.

And this is even before the big change. As you mentioned, the portion of nonrecurring revenue is decreasing definitely at the first part of the year, and we believe that this trend will continue into the future. So if you take the overall profile of the gross margin, we do see a scenario that it's definitely balanced itself to the level that we were before COVID.

For the short term, we are probably -- we are not providing any guidance on gross margin, but we do not expect it to go much lower below the level that it is right now. And for the midterm, definitely it's going to improve for some of the reasons that you mentioned, especially the fact that we are reducing the portion of the nonrecurring revenue going forward and we are continuing to optimize our system.

So to make a long story short, definitely we see a very balanced situation of the gross margin. It's not going below the 60% as we had some pressure before. And down the road, we will see a scenario that it will improve. It's definitely a trend that will help us to improve the overall gross margin and take us back to profitability.

We are not changing the view of the medium to long-term profitability to come back to a run rate of profitability in the next couple of years. It's still the plan. Obviously, we will monitor it very carefully as we are adjusting our expense base and we are investing so much to fuel our growth, but definitely the overall plan didn't change to take the Company to profitability.

Thank you, Yaron. I will just say that our current 62% consolidated gross margin is not too far from our pre-pandemic consolidated in 2019, which was 63%, and we did have a quarter-over-quarter improvement in our subscription gross margin because of everything that was said, the move to AWS and the consumption levels that are somewhat coming down.

But it's still -- we are still lower than the pre-pandemic subscription GM. Not in media and telecom, which improved across everything, both the ratio of recurring and nonrecurring, and the subscription GM was much better; but in EE&T, it's still because of the heavier weight of all the accumulated pandemic storage. And some of the consumption, we think it's still going to improve. And with that, improvement in ratio of professional services versus recurring revenue is going to continue to help us. And that's both in EE&T.

So if you look at virtual events, the first ones required a lot more professional services than the ones that we are doing now and definitely the ones we are going to do in the future. So in the longer term, everything is going to scale towards the same direction that we spoke about in recent weeks and months, and we are optimistic on the growth of the gross margin. Thanks again for the question.

DJ Hynes, Canaccord Genuity.

Congrats on the IPO and nice start here. Ron, I was hoping you could talk a little bit about the ed tech market and where they are in terms of buying cycles. I would have thought that a lot of higher ed and even K-12 buyers would have made their video bets last year during the pandemic. So wondering if there's any risk that sets us up for softness in the vertical over the next couple of buying cycles. Can you just talk about that dynamic and what you are seeing in that market?

Happy to do that. So as you know, we power half of the R1 schools in the US, including seven of the eight Ivy League schools, and we've been for years the leading video content management system that runs and manages everything video in all these different schools. Throughout the years, we have started to go down-market. Part of what we are doing now is moving deeper into K-12 schools and more government deals that are taking full countries and full regions.

And I'd say more generally, we have moved as you know from VOD live to RTC and with the addition of our virtual classroom products, are in a wonderful place to consolidate the full stack between on-demand, live and real-time. And that's something we haven't had to date. This started at the end of last year. It's starting now to get into what we do in 2021, and we are seeing the initial acquisitions of these products that integrate it all together.

Now to be clear, we are integrated into Zoom and into Teams and into all the RTC providers, and we've actually launched this quarter a better integration with some of these so that enables us to provide even more value for those that are using Zoom or Teams for the virtual classroom element. But the alternative that we offer now that enables everything to connect to the gradebook and to the LMS and to have a continuous solution from on-demand, live and real-time is really, really attractive.

So I think that some schools have put a patch, but as they look into the future, they are not looking at just adding remote people but truly disrupting how education is done in this post-COVID world. And they are not just interested in piecemeal solutions but a full end-to-end remote solution for on-demand, live and real-time, and Kaltura has been a wonderful place to do that. So whether it is increasing wallet share through real-time with existing universities or going down-market to K-12 and going global, we still have a lot of juice to go with education.

Got it. Yes, that makes sense. And then maybe as a follow-up, I wanted to ask you a little bit about the strategy with your meeting solutions. I think investors hear that category and they immediately think, oh my God, Zoom, Teams, Meet, like how is Kaltura differentiated in the space? Is it really about kind of wrapping the rest of the portfolio around it? Maybe if you could just talk a little bit about that.

Sure. So first of all, we are not really selling at this point aggressively for the collaboration and communication use case for RTC, or ergo, going after Zoom or Teams. The RTC is an addition to our learning and development internally for training, with a virtual classroom for schools. It's also externally with webinars and definitely as a piece of our solution for marketing, integrated into the Virtual Events platform and any other events that we offer.

So the power of Kaltura is the consolidation integration between VOD, live and RTC, not standalone RTC. So will you see us in the near future selling to consumer or SMB or regular, large, even enterprise, the pure-play meeting solution? Less so. In the future, could that happen? It might.

One of the things that we are seeing is the people definitely on the larger enterprise are consolidating for one vendor that addresses all their video needs to avoid silos and to be able to have less redundancies, and Kaltura is the number one player that does that. But we are also, like I said, integrated into all the other players. We are the video content management platform that brings together even Zoom and Teams. In a lot of these places where they have one or both, they'd like to have it all managed in one place and definitely also integrated outside of the scope of, for example, Microsoft products.

So the short answer is not direct competition, definitely not SMB and consumer with Zoom and Teams, absolutely as it pertains to integrated workflows for learning, marketing and events and larger enterprise and integrated and consolidating all the different use cases into one platform. Does that address your question, DJ?

Yes. Steve Enders, KeyBanc Capital Markets.

Okay, great. You mentioned in the script the channel was improving as a mix and I think drive some bookings there. I was just wondering what you would attribute the strength of channel partners as part of that, and how are the cloud providers ramping as a partner for you at this point.

Yes, happy to answer that question, Steve. Thanks again for your time. So channel, for years, have been kind of at the mid-single-digit, high-single-digit part of our new bookings, I'd say, and are now starting to ramp up to be a more significant contributor to that.

Part of the issue was how self-serve or low touch our products are. When you deploy things through channels, you'd like it to be, a, addressing a very large array of customers and, b, relatively easy to sell, integrate and deploy. And that is not what we historically had been.

As you look into the addition of RTC as a capability, we are now coming to solutions that are catering to smaller companies. And you know we are going to go to SMEs, whether it's K-12 for schools, whether it's SMEs in the enterprise, whether it's smaller media companies in media and telecom, whether it's more the broader startup community and tech developers for the tech OEM side. And as we open up the volumes and -- then channels become a lot more relevant, and we are seeing that start to happen.

Some of these channels are value-added resellers and integrators that have specific affinity to specific industries. The one that really drive our attention are the global big ones as well that are catering to infrastructure as a service. Video is the biggest consumer and accelerator of IaaS consumption so there is a lot of synergy between IaaS, PaaS and SaaS in video. And partners like AWS that are now co-selling and reselling us through their marketplace are benefiting through tremendous amount of consumption of their resources, and they have a one plus one equals three.

So we are in the process of training salespeople. AWS is a great partner. We are also in the process of looking into a multi-cloud strategy to address more partnerships, and so I think there's a lot more good stuff to come.

Ryan Koontz, Needham & Company.

I wanted to follow up on your channel model there and the types of partners you are targeting. It sounds like a lot of infrastructure-as-a-service partners. As they look at their solutions, what are the types of products in their portfolio would they be bundling with Kaltura?

Thank you. It depends on the type of partner. I mean, if it's a standard IaaS provider, then it's enough that we are basically consuming storage, delivery and compute, which we do in gross. So now the question is really are they a value-add provider with SaaS solutions?

And that could work in two different directions. They could either have a full OEM deal using our platform as a service to videofy their products. As you know, we have announced such a relationship with many players, including Oracle, where they add our video capability into theirs. And if it so happens that it runs on their cloud environment, that's even better. But there is others that could sell alongside Kaltura or be co-sellers, and that's especially folks that have sales teams that are addressing the customer experiences or the internal learning and development HCM-type sales, and so it varies.

We are looking for all types of partners, but the ones that are most interesting for us have both alignment around the infrastructure as a service, a platform as a service and the software as a service as embedded and/or as a co-sell/resell. And I hope we are going to have some more good announcements in the months and quarters to come.

Ittai Kidron, Oppenheimer.

Congrats again, guys, on the IPO. Ron, maybe I want to talk about the upsell opportunity. You've mentioned before that half of your customers are buying three or more of the offerings. Maybe perhaps you can call out for us what are the three most popular offerings right now, and how would you think that would change perhaps in a couple of years?

So historically I'd say that the biggest sellers for us were the core platform that includes our media content management capabilities, together with our video portal, together with our learning platform or integration into the LMSs. So that was -- and I am putting aside TV for a second because for TV, we've moved gradually from OVP for small media companies to full on cloud TV. But in the EE&T, it was content management, video portal learning platform with LMSs.

Now from a momentum perspective, the most popular solutions on the enterprise side are webcasting together with virtual events, and we are seeing the beginning of virtual classroom. But what's very interesting is that they come together. So seldom that people go and say I'd like to have webcasting without the video portal, or I'd like to have a virtual classroom without the LMS integration, or that I'd like to have a virtual event that by the way banks on VOD live and RTC without having the rest. So it's in addition; it's not instead, but they drive a lot of acceleration to what we've had before.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Yekutiel for any final comments.

Yes, I just want to thank you again, everybody, for your time and attention. I know it's a busy period, and you've made a lot of time to stay with us. We will be happy to provide you further information if and when you are in touch with us and wish you a great day and remaining of the week and talk to you soon. Take care.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.