Kaltura (NASDAQ:KLTR) Q3 2022 Earnings Call

0:00 Good morning, everyone, and welcome to the Kaltura's third quarter 2022 earnings call. Please note that this event is being recorded. All material contained in the webcast is sole property of and copyright of Kaltura with all rights reserved. For opening remarks and introductions, I will now turn the call over to Erica Mannion at Sapphire Investor Relations. Please go ahead.

0:25 Thank you, and good morning. With me today from Kaltura are Ron Yekutiel, Co-founder, Chairman, and Chief Executive Officer, and Yaron Gamazi, Chief Financial Officer. Ron will begin with a summary of the results for the third quarter ended September 30, 2022, and the trends and areas of focus that are expected to impact the remainder of 2022. Yaron will then review in greater detail the financial results for the third quarter, followed by the company's outlook for the fourth quarter and full year of 2022. We will then open the call for questions. Please note that this call will include forward-looking statements within the meaning of the federal securities laws, including but not limited to statements regarding Kaltura's expected future financial results and management's expectations and plans for the business.

1:15 These statements are neither promises nor guarantees and involve risks and uncertainties that may cause actual results to differ materially from those discussed here. Important factors that could cause actual results to differ from forward-looking statements can be found in the risk factors section of Caltura's annual report on Form 10-K for the fiscal year ended December 31, 2021 and other periodic SEC filings, including the quarterly report on Form 10-Q for the quarterly period ended September 30, 2022 to be filed with the SEC. Any forward-looking statements made in this conference call, including responses to your questions, are based on current expectations as of today. and Kaltura assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law.

2:07 Please note, we will be discussing a non-GAAP financial measure, adjusted EBITDA during this call. For a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP metric, please refer to our earnings release, which is available on our website at www.investors.kaltura.com. Now I'd like to turn the call over to Ron.

2:30 Thank you, Erica, and thanks to everyone for joining us on the call this morning. Today we reported total revenue for the third quarter of 2022 of $41.1 million, down 4% year-over-year, and subscription revenue of $37.9 million, up 1% year-over-year. Adjusted EBITDA for the quarter was negative $7.2 million. In our last earning call, we made three important financial forecasts. An expected return to revenue growth in Q4, fueling a higher year-over-year growth rate than 2023, expected gradual quarterly improvements in adjusted EBITDA towards a single-digit loss next year, and an expected significant improvement in cash flow with a forecasted single-digit aggregate cash flow from operations loss in the second half of this year.

3:24 Today, we are reaffirming all of these three forecasts. Regarding revenue growth, after a tough year that saw an initial quarterly decline in subscription and total revenues, followed by close to flat revenues, we are forecasting for Q4 a sequential revenue growth rate at a level that we have not seen since the first half of last year. Regarding profitability, While the effects of our recent cost reduction have only partially affected this quarter, we have already seen a reversal of the trend of our bottom line with an adjusted EBITDA loss that is lower than that of the last three quarters. The improvement in profitability is expected to continue in the coming quarters as we continue to execute on our plan to return to profitable growth.

4:14 And regarding cash flow, we had a positive cash flow from operations quarters. We expect that our aggregate cash flow from operations in the second half of this year would be a single-digit loss as previously forecasted. We remain committed to rebalancing the company's cash flow as we have done in 2019 and 2020 without requiring additional funding. In the third quarter, we close new business across all of our segments, empowering employee and partner communication and training, customer engagement, internal and external facing events, Student Learning, and TV Viewership. Companies are continuing to move their work streams online and value KOTOR's ability to cost-effectively provide them with a single, flexible, tightly integrated, and engaging enterprise-grade platform that can holistically power integrated, on-demand, live, and real-time video experiences across multiple use cases.

5:14 Today's challenging economic climate highlights the importance and advantages of Cultura Solutions, since customers seek more than before to reduce budgets and consolidate vendors. Among this quarter's new deals were several seven-digit transactions with a South American media company, with an Asian bank that is a new Cultura customer, and with a leading U.S. bank that is expanding the use cases for which it is utilizing Cultura. Both banks have signed up now to use Kultura to power their events. We're seeing growing demand for our events offering across many industries beyond technology companies, which were the initial buyers, including, as mentioned, financial services, as well as consulting services, pharma, manufacturing, and education.

6:05 Well, on the topic of events, I would like to remind you that on November 15th and 16th, we shall be conducting our second annual virtually live event or event professionals, marketing leaders and digital experience creators will exchange thoughts on the state of future and future of online and hybrid events. Those interested are invested to join us and the already thousands of registrants to listen to our incredible lineup of speakers, which include leaders from Accenture, Lenovo, AWS, SAP, Salesforce, Oracle, Adobe, Microsoft, Google, Cisco, IBM, Airbnb, VMware, and many, many more. On the product development front, the biggest news this quarter was the anticipated launch of the new version of our webinars offering.

6:58 Our new release includes the ability to launch many sites for each webinar with unique branding, as well as advanced engagement options coupled with rich analytics. The new version also includes advanced recording options, as well as automatic publishing for webinar recording. Our new webinar solution is available for self-serve or self-assisted purchase through our website with packages available both for personal and team licenses. We also continued advancing our comprehensive event offering with a user-friendly orchestration and management layer to easily set up and manage branded events. Enterprises can leverage our platform to centrally manage large numbers of virtual and hybrid events for marketing, Corporate Communications, Learning and Development, Recruitment, and more. During the quarter, we invested in simplifying event management, advancing our integration with third-party systems like Marketo, more user-friendly experiences for SMDs, and more advanced analytics.

7:58 We also added richer functionality for the management of on-demand assets within events. While we have a more robust and diverse product offering in the second half of this year, In summary, While the macro conditions continue to be challenging and have contributed to a delay in our return to growth, we are continuing to make progress in improving our bottom line in cash flow and are still expecting a return to revenue growth in Q4.

8:51 We continue to believe that the growing need for advanced video solutions, coupled with our robust and expanding differentiated product offering, will bring us back to profitable growth. With that, I'll turn it over to Yaron, our CFO, to discuss our financial results in more detail.

9:08 Liron. Thank you, Ron, and good morning, everyone. As I review the first quarter results, please note that I will be referring to a non-GAAP metric adjusted EBITDA. A reconciliation of GAAP to non-GAAP financials included in today's earnings release, which is available on our website at www.investors.cultura.com. Total revenue for the first quarter ended September 30th, 2022, was 41.1 million, down 4% year-over-year. Obstruction revenue was 37.9 million, up 1% year-over-year, while professional services revenue contributed 3.1 million, down 41% year-over-year.

9:54 These figures also embody an approximate revenue reduction of 0.4 million as a result of currency headwinds that occurred during the third quarter. These headwinds are forecasted to continue and weigh on our revenue during the fourth quarter as well. The remaining performance obligations were $169.2 million, up 4% year-over-year, of which we expect to recognize 65% of the revenue over the next 12 months. Annual recurring revenue was $152.9 million, up 1% year-over-year. The remaining performance obligations and annualized recurring revenue metrics also incorporate the impact of the currency headwinds that occurred during the third quarter.

10:42 Our net dollar retention rate was 96% in the first quarter compared to 100% in Q2 2022, though our gross retention rate remained in line with our long-term historical levels and was even higher than that of the last three quarters. Note that this quarter's net dollar retention matrix incorporates the full impact of the large customers that, as mentioned in our last earnings call, renewed some of their business with us in the fourth quarter of 2021. This customer has since renewed various existing projects with us and partnered with us on new ones, including in the passing quarter. Net dollar retention matrix also incorporates the impact of the currency headwinds that occurred during the quarter.

11:29 While downward pressure on federal retention will soon impact the coming quarter, we expect it to gradually improve next year. Within our E&P segment, total revenue for the first quarter was $13.1 million, down 1% year-over-year. Subscription revenue was $28.7 million, up 3% year-over-year. While professional services revenue contributed $1.4 million, down 44% year-over-year. Within our M&P segment, total revenue for the first quarter was $11 million, down 13% year-over-year. Extension revenue was $9.2 million, down 5% year-over-year. While professional services revenue contributed $1.8 million, down 38% year-over-year.

12:21 GAAP gross profit in the quarter was $26.4 million, representing a gross margin of 64%, down from 65% gross margin in Q3 2021. Within our E&T segment, gross profit for the third quarter was $21.2 million, representing a gross margin of 71%, down from 73% gross margin in Q3 2021. Within our M&T segment, gross profit for the third quarter was 5.2 million, representing a gross margin of 47%, up from 45% gross margin in Q3 2021. R&D expenses for the third quarter were 13.9 million, or 34% of revenue, compared to 29% in Q3 2021.

13:14 The increase was driven by additional headcount and personal related expenses that are associated to developing our new product. Sales and marketing expenses for the third quarter were $15 million, or 47% of revenue, compared to 26% in Q3 2021. This increase was driven by additional sales and marketing investments, including headcount and personal related expenses that support the go-to-market efforts around the new products. GMA expenses for the first quarter were $11.4 million, or 28% of revenue, compared to 23% in Q3 2021. The increase was driven by additional accounts and third-party related expenses related to being a public company.

14:06 Job net loss in the quarter was $19.4 million, or 0.15 per diluted share. Adjusted EBITDA was negative $7.2 million, decreasing from a negative of $2.3 million in Q3 2021. This resulted due to our former plan to increase our spend in order to further fuel our growth. Turning to the balance sheet and cash flow, we ended the quarter with $94.3 million in cash and marketable securities, providing us with an ample cushion to continue to invest in our business through the current macro cycle. Net cash provided by operating activities was 1.1 million in the quarter compared to a negative 5.7 million net cash used in operating activities in Q3 2021 and compared to a negative 19.6 million and negative 22.5 million in Q1 2022 and Q2 2022 respectively.

15:08 The improvement was driven by seasonality, a strong momentum in the Council's Silver Bell collection, and the initial impact of our cost reduction. We are still expecting an ugly single-digit net cash flow loss from operation in the second half of 2022. I would now like to turn to our outlook for the fourth quarter of 2022 and for the fiscal year ending December 31st, 2022. In the fourth quarter, we're expecting the subscription revenue to grow by 0% to 3% to between $38.5 million and $39.5 million, and total revenue to increase by 1% to 3% to between $43 million and $44 million. We expect the negative adjusted EBITDA to be between $6.5 million and $5.5 million. For the full year, we expect subscription revenue to grow by 4% to 5% to between $151.4 million and $152.4 million, and the total revenue to grow by 2% to between $167.7 million and $168.7 million. We expect the full year negative adjusted EBITDA to be between $30.5 million and $29.5 million.

16:28 In summary, as Ron mentioned, we continue to focus the return to growth this quarter In line with our original forecast of acceleration during the second half of this year, I'll be softer and delayed within the second half because of this year's macro-sync consensus. The cost reduction and the reorganization that we have conducted is helping us to bring back to a profitable growth and our cash flow is improving. We continue to forecast and aggregate single-digit cash flow from operation loss in the second half of this year. With that, we will open the call for questions. Operator? Thank you. We will now be conducting a question and answer session.

17:13 If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Gabriella Borges with Goldman Sachs. Please go ahead.

17:39 Hi, this is Jake Titleman on for Gabriella. Ron, you know, you mentioned that Q4 will grow sequentially at a level that we haven't seen since the first half of 2021. Are you assuming that the macro environment improves to achieve that level of growth in Q4? Or do you currently have enough visibility into revenue to be confident in that guide?

18:01 Hey, Jake, thank you for your question. No, we're not assuming and we have enough confidence to support the guide. We've long stated that the second half of the year would show acceleration. We said earlier that we were hoping for it to be Q3 and it got pushed into Q4. And indeed, Q4, we already have the numbers in pocket that support that.

18:20 Got it. And then for my follow-up, last quarter you talked about how bookings rebounded to the highest level since, I think, Q3 of last year. How did Q3 of this year compare to Q2, and did trends improve or worsen on a monthly basis going through the quarter?

18:35 Yeah, thanks for that. Let me give you some color on the quarter. It's a first-year question. Q3 bookings were somewhat below Q2, but they were still better than Q1 and Q4 of last year. The same goes with Salesforce productivity on average. and that was conducted on more or less a similar amount of RAMP salespeople as the quarter before. Maybe a bit more color as we look at the trends. Most of the booking was as usual from Enterprise, then followed by EDU and M&T at the same level, but Enterprise was by far the strongest pull. Same split between upsell and use, same geo, same channels and a bit less services in line with recent trends over the year in which it's more and more low touch and less and less services. There were some good tailwinds that continued forward.

19:22 First is kind of the overall underlying shifting work streams online, digital transformation, but now even more as you get into this economic situation, saving money by reducing travel costs. So that's good. We are seeing customers that are looking to improve budget efficiency and consolidate vendors, and Cultura is one of the only vendors that could really support any type of event, plus internal use case, et cetera. We're seeing more opportunities open up for events. and by that I don't need the large conferences events but any event of any size, internal, external and the percent of the event deals from our total bookings continue to grow. We are seeing that expand beyond tech into multiple verticals. Initially we had tech and now we have banking and business services and farmland education manufacturing.

20:09 In general, financial services continues to be really strong for us. EDU, we've seen very strong win rates continue. We're seeing an event platform enter that market. We're seeing increased work with K-12 and increased success in Europe. And in M&T, we're seeing mainly expansion of existing customers. Now, touching on some of the headwinds that are affecting behavior. So one, we're still seeing, of course, the devaluation of the euro, and that continues to affect us because we have a fair bit of our revenue coming from the euro, and that's affecting our financials in Q3 and also Q4 and earlier. We haven't seen it in the second quarter, but we are seeing customers starting to hold back on their spending and talking about them being more risk averse. We are seeing budgetary constraints affecting some demand, dropping of prices by competitors, albeit that we're still holding, again, the win rate that we have against these competitors, but we are seeing that behavior in place.

21:08 We're seeing RFPs that are coming lower than before. We're seeing the number of deals that are converted from top of the funnel into actual meetings come down compared to the first half of the year. And compared to last year, we're seeing organic usage come down a bit. In EDU North America, we're seeing a bit softer. In M&T, we're seeing less new deals. So the difference, I guess, from Q2 to Q3, it's still better than Q1 and Q4. And we're still having all these directional pushes with everything we're doing. But we do see some more of that macro impact land in Q3 behavior. Does that address your question, Jake?

21:44 Definitely. Thanks for all the calls. I appreciate it. Good luck.

21:48 Thank you, Jake. Next question comes from Matt Nicknim with Deutsche Bank. Please go ahead.

21:56 Hey, guys. Thank you for taking the questions. Two, if I could. Just first on adjusted EBITDA. So I just want to make sure I understand this correct. If you're exiting the year at an implied 6 million EBITDA loss, Yaron, I think you mentioned next year the anticipation is still a sort of single-digit million EBITDA loss for 23. So if you can maybe help us think through the roadmap to achieving that level. And then secondly, on the net dollar retention rate, I appreciate some of the color you gave. Maybe if you can just help us unpack where you're seeing some more outsized pressure. I think you had mentioned there's an expectation that remains pressured in 4Q before reversing next year. and any sort of specific segments or verticals where you're maybe seeing a little bit more pressure there. Thanks.

22:43 Thank you very much for the question, Nick. So regarding the first question on the adjusted EBITDA, you're right. If you just take the Q4 adjusted EBITDA and multiply by four, you do not get to the previous targets that we gave, but we do believe that next year is going to be a one-digit loss to adjusted EBITDA. Obviously, you need to take also the growth that's going to happen from the top line. Even if you take just the current run rate of the revenue for this quarter and take it with no additional booking, net booking, then you get to very similar growth rate for next year, but we believe that the number will be higher, which will help us to balance the expense base.

23:28 At the same time, I can tell you that There were some one-time expenses that we incurred in Q4, which are not going to impact the next year based on our current plan. And the third line item is that we didn't materialize all the savings that we planned for this year, meaning some of the cuts that we did because of notice period, etc., will impact mostly Q1 numbers. So the full impact is not yet embedded in the numbers. We still believe and we are planning the company in a very thoughtful way, the P&L, in order to achieve the adjusted EBITDA, one digit adjusted EBITDA, negative adjusted EBITDA for next year.

24:14 And we do believe that we have a plan to do it. By the way, even if by the end of the day we will see that a top line is not behaving as we planned that it's going to behave right now. So we still have room to play and the plan is still the same plan. Regarding net dollar retention rate, one thing that I can tell you which is very encouraging, the net dollar retention rate which obviously went down this quarter, the one reason that is not impacting the net dollar retention rate is the growth churn.

24:43 Actually, the growth churn for this quarter was a bit better than previous quarter.

24:48 So we don't see a significant pressure coming from current customers, definitely not specific customers. We are taking into the full impact right now of the major customer that produced revenue with us last year. And now we are comparing the full quarter that was last year to a current quarter that take into account the reduction of this specific customer. And by the way, the customer is already renewing business and hopefully it's going to increase in the coming few quarters. It's still a very significant customer. And yes, we did have some impact coming from the currency exchange, which impact most of the top line KPIs and also this quarter. We do believe that there will be some additional pressure going into this quarter into Q4. So maybe we can go down by one or two point, but we definitely see the situation turning around especially that we will start compare quarter which are post-COVID to quarter that are post-COVID. So in our forecast for the beginning of the year, we do see the numbers getting closer to where it was before the last few quarters.

26:10 Does it answer your question?

26:13 It does, it does. Thank you very much.

26:16 And just two more points, Matt, on your questions for myself, Ron. One on the adjusted EBITDA, and you've heard there's stuff in pocket that's going to probably hopefully bring us better than currently guided, but beyond that, we'll continue to do better next year. But I just want to note again that we were profitable in 2019. We were profitable in 2020. I remember that that was the single most asked question when we built the company, and why did we do that? We said we fundamentally believe in that, and we worked hard to get there, so we know how to get back there. We've proven that in the past, and we're proving it now. We'll continue to. The second, on NDR, and Yaron had addressed our gross retention that indeed has always been good and continued and is even better this past quarter and that there's a gap in the impact between that because NDR looks trailing 12 months, looks at historical gross retentions, but also looks at the comp year being a tough year with COVID and also looks at FX. One data point I'll throw out there, if you take into consideration both the single customer reduction that we had mentioned, the large one, That is coming back and growing and already turning around to be growing on a sequential basis.

27:22 And if you take off the FX impact, we would have been at about 100% plus. So it's obviously not enough. We'd like it to be higher again back into the comp here that we're looking at. But it is a few points higher if you would have taken these factors out. Thank you, Matt. Next question comes from DJ Hines with Canaccord Genuity. Please go ahead.

27:46 Hey, good morning, guys. So Ron, I want to double click on some of the corrective actions that you've taken internally. I think I would have expected to see a little bit more EBITDA margin improvement in Q4. I think I understand based on kind of your explanations that this is still a work in progress. So maybe talk about like where you are in terms of implementing some of these changes. And more interestingly to me, like what are the biggest risks you're keeping an eye on from an operational standpoint as you consolidate business units inside of Kaltura and lean out the organization?

28:20 Sure, DJ. Thanks for the question. So first of all, to remind us when we made the cuts, there was a 10% reduction from both our fully ramped up full-time employees as well as consultants and otherwise. So on both accounts, both for the part-time and full-time folks. We did that swiftly and effectively. By the way, employee morale has kept. If you're asking about one important thing to keep an eye on, that would have been voluntary departure rates. They've been kept and actually we see even less voluntary departure. As of recent, I think it's not just the economy and what's happening around us. It's the very concrete plans that we've had and the clarity in the company about what we're trying to achieve and the overall engagement rate of employees in the company as always. The majority of the cost savings hasn't impacted yet Q3.

29:09 Most of it is going to come into Q4. To give you a feel, the impact in Q3 was $1.7 million a quarter. The impact on Q4 is going to be $2.7 million more, bringing it close to the full 4.6 impact. So there's more impact that's coming in Q4 than there was in Q3 materially, and that's going to help us from an adjusted EBITDA. And I will note again that we're trying to be thoughtful about the numbers. There's also some one-time stuff in Q4, so the various reasons mentioned We're hoping to do better and we're definitely continuing to expect to do better later on. So that's a bit about the changes now. And so far as the reorg, I mean, we discussed that last time that there were various things that we streamlined. We moved to have a one marketing team instead of marketing being split between the business units, the one professional services team that's addressing all of it, one support team.

29:59 Again, there's some internal and many more divisions within it, but more efficiency for the scale that we're operating in and for the type of behavior of the different divisions that we're behaving with. Because historically there was a bigger split in behavior, and now given the complexities of some of the ENT stuff that are getting closer to ENT, and you see the gross margins even getting closer, then it makes sense. And so far I have to say that the biggest risk was to make sure that this works, that people are able to come in, not just stay in the company, but work effectively, that the move across All the different departments is working, and so far it is absolutely working. So from a RE-ORG perspective, I think we're good. From the overall profitability goals into the future per the earlier question, we need to continue to monitor the macro behavior, and we will continue to adjust as required in order to achieve our profitability and cash flow goals.

30:49 As mentioned, we've done it in the past. We know what to do. There's more areas if we need to apply levers that we could apply these levers. But right now, we're advancing forward. Is that addressing the question, DJ?

30:59 Yeah, no, it's a super helpful caller.

31:02 Maybe a follow-up.

31:03 Look, we're hearing from others in the virtual event space that it's pretty tough out there. You know, we've seen kind of this pretty significant shift back towards in-person activity. You're highlighting virtual events as a bright spot for Kaltura. Like, what are you seeing that others aren't, and why do you think that's playing out?

31:22 That's a great question. So, a few things. So, first, when we We discussed this earlier this year. We've been less focused on catering to large flagship events, the ones that come with a lot of services and also known as kind of a Tier 1 event. And instead launched this year, and I've been beefing up our event platform offering, which is self-operated. It powers small and medium-sized events. These are the type of events that are putting together tens or hundreds of people at times. They could also be thousands, also known as Tier 2 and Tier 3 as opposed to just Tier 1. So we're not really talking about powering virtual conferences. If you hear about some of the folks out there, they're talking about the huge events that are online that are now becoming hybrid and are now moving more physical. That's the big, big events.

32:07 What we do runs the gamut from internal to external, from marketing to customer education, sometimes even full-blown conferences, but it's more training, executive communication, small digital gatherings. So it's not just the large stuff. and the unique element about us is that we are the one product that addresses all these use cases. So while the COVID effect has come down and companies are still seeking to engage ways to bring together their employees, partners, customers online, actually in today's macroeconomic environment the argument is that online gatherings are even more so important because of travel savings and improved efficiencies and also obviously given the distributed workforce and work from home. So I don't think anybody expects that suddenly everybody's gonna work in the office and everybody's gonna fly all over the place. It's just that the mega conferences are not 100% remote and that's not what we have been focused on.

32:59 So like I said, we're continuing to sell a bunch of other things, but the percentage of our event related, again, not multinational conferences, but event related activity has gone up. It's now more than 50% of our E&T booking and a material part of our total company booking. Our pipeline is growing. It includes seven-digit deals. I mentioned earlier that it's not just in tech. It's grown in various areas. And we're quite unique in our ability to offer one global stop for all things. By the way, content management and this. Now, the other point I would just note is that when we're speaking holistically about events, it does also include the concept of webinar. Webinar is basically a tool for events, but it's just a single-session event as opposed to a multi-session, multi-track event. And now we brought the power of our development of events into the realm of webinars this quarter.

33:49 So the improvements that we have done there on the webinar tool that we had historically is now having a tool that's really simplifying creation, managing webinars, much more engaging experience for employees. So we now have a very, very strong webinar offering. So we think the combination of both of these that are focused not on the mega events but on activities that people need to do online is relevant now, it's relevant next year, and for sure is going to be continuously relevant into the future. Does that address your question, DJ?

34:17 Yeah, it sure does. Appreciate all the callers. Thanks, Ron. Thank you, DJ. Next question, Michael Torin with Wells Fargo. Please go ahead.

34:28 Hey, guys. This is Austin Williams on for Michael Torin. I just wanted to follow up on TJ's question and touch on competitive positioning and the pricing side of things. I think you mentioned that there was some pricing compression from other vendors in response to a previous question. So I guess just can you provide an update on how the competitive landscape is evolving and just if you're seeing any pricing compression on your side as a result?

34:54 Yeah, happy to do so. I mean, you've heard some of the other earning calls and you've seen that most of the other folks out there All of them are talking about headwinds. They're showing sequential decreases. They're talking about a reversal of growth somewhere around the middle of next year. They're either providing or not providing guidance for Q4, but it is looking like a sequential decline, and I'm happy that in our case there is some degree of earlier turnaround given the nature of what we're doing. You also heard from some of them that they're talking about the power of the enterprise sale, which is what we have always been doing, large enterprise. We're not doing S&B, and one thing to clarify is When we are getting even into webinars, it is more product-led growth type initiatives aimed at the SMB market, small-medium enterprise, not small-medium business, definitely not consumer.

35:40 So it's more departmental sale and the ability to just quickly and in a more easier fashion get into the enterprise. So I think we're very much aligned with what's working out there. I think we have a very strong offering given the and people looking for one solution to address multiple use cases, which we have more than others. So statistics doesn't show that we have any issue as compared to other competitors. Our close rates, our win rates are maintained very high. And the flip side, we're showing, I believe, financial recovery at a level that is faster than some of the other guys for reasons mentioned. Next question comes from Ryan Kuntz with Needham & Company.

36:28 Please go ahead.

36:31 Good morning. I was hoping you'd walk me through your progress in the self-service model and what your kind of updated thinking is there. It sounds like you're moving toward a lower-touch model, and maybe just kind of walk us through some of the nuances there between self-service and low-touch and what you've learned since you've launched some of your new products. Thanks.

36:53 Thanks, Ryan. You know, in general, and I just mentioned that we are, we came from the content management world where it was a CIO type sale, long sales cycles, large enterprise, very sticky, takes a long time to deploy and to sell. And we, as we've expanded, not replaced, but expanded also into CMO use cases with additional products that were launched over the last couple years, including the virtual classroom, webinar and events and now the event platform. We started getting into areas which could cater to, A, smaller enterprises, but also to faster deployment cycles, which is important for us. So the very first product there was more the EP product, the event platform product, which is low touch in the sense that people could immediately get events going.

37:39 They don't need to have a lot of professional services. Again, that part of our revenue has come down, but we've built our products to better support that, to require less professional services. So that was the first part. And we've established our commercial sales team that's increasingly selling against these lower touch opportunities as opposed to the outside sales team. But what we've done now with this release of webinars, which is for the very first time a very formidable offering for complete self-serve, is to really enable more around complete online sales. And like I said earlier, it's more for The purpose of product-led growth still catering to SMEs and departmental sales. And so I mentioned earlier that we had improvements around simplifying the creation and management of webinars for the organizers and that we've also made the experience more engaging for attendees.

38:33 Just a few quick examples. We have automatically generated landing pages now that users can add their logos and images and headshots and automatically generate a beautiful landing page for registration. We have mini sites that are easy to operate where the branded mini sites and virtual room includes the organizers information topic and everything else. We have automatic recording using the same URL. We have a lot more engaging tools like polls and announcements and opening up chat for audience and crowd reaction and then a bunch of other things around scalability and analytics. So it's for the first time I'd say a serious offering in the webinar space that's differentiated and how it's connected between VOD and real time and live against anything that's out there. We believe that could do extremely well.

39:19 That ushers the opportunity to go further down market to more self-serve type sales, but also very clearly not to SMBs, only to SMEs and product-led growth to enable the cycles to run quicker. So yeah, this trend has happened this year. I expect the revenues from EP have started to affect this year. So some of the deals that have closed around events are around our EP. As it pertains to webinar, we just launched the products available on our website. We're going to be starting to market it now in Q4, but the impact is going to be more next year as opposed to this year.

39:55 Got it. Super helpful. Thanks, Ron. Thanks, Ron. Next question, James Corey with Bank of America. Please go ahead.

40:03 Yes, how are you doing? This is James Corey on for Michael Funk. Last quarter you guys talked about, you know, churn levels being in line with historic levels, and I guess they were, you know, a little bit lower this quarter. But can you talk a little bit about where you expect those levels to be heading into 23, especially, you know, as the macro worsens? And, you know, a follow-up to that would be what additional levers can you guys pull if the macro is worsened to ensure you reach your EBITDA targets?

40:31 I'll take the first one and let Jeroen address the other one. I mean, yes, growth retention remains strong. and it was actually the best one that we've had in the past year since Q3 2021. Again, they're all best practice for large enterprise-type sales. I'll throw you, it's a single-digit annual run rate for gross retention, annualized, if you run it over the quarter, so it's great. It was a good number, by the way, for both M&T and E&T, both of them doing very well. What do we expect next year? I mean, we don't see a reversal of this trend. Could there be some more downward pressure on this because of reduced pricing from existing customers that could push prices? That could be, to be clear, when we talk about retention rates, obviously it's inclusive of full churns as well as any price reduction that's baked into that number.

41:22 So there might be a bit more pressure given the financial situation. But again, we're not seeing indication right now as we look into Q4. We are looking into a similar, maybe even better, hopefully, but not a deteriorating situation for Q4 compared to what we've said right now. So we'll keep your abreast as we finish next quarter and as we continue to look forward. We'll let Yaron talk about levers for adjusted dividend. Go ahead.

41:45 Yes. So obviously this year, based on the guidance that we provided and we feel very comfortable with the guidance, we will end the year with a negative adjusted dividend of around $30 million. The second part of the year is definitely going in the right direction. And this trend is going to continue going into Q1 with the actions that have already been taken. So what we are doing right now, obviously, we are not just waiting to see if markets or the macroeconomics can go to the wrong place. We are continuing in a very thoughtful way to think and to consider some other options. which we still have in our pocket that we can implement beginning of the year if and when we decide to do it in order to meet our targets.

42:32 We feel comfortable that we will be able to achieve the one-digit negative adjusted dividend for next year which will create a situation that by 2024 will be also positive in the cash flow, meaning we will be able to continue to run the company and still show a very nice growth number while basically eliminating the loss that we have on just the EBITDA base.

43:01 One small clarification I just want to make sure because I just noticed that when I was referring to gross retention as a single digit, obviously it was the opposite, which is the gross churn. So what I meant is that it's above 90% gross retention if it were to be a single digit and less. So strong gross retention.

43:20 Gotcha. Okay. Thank you for that. Thank you. Once again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from Tom Blakey with KeyBank Capital Markets. Please go ahead.

43:39 Thank you, Erica, and thanks, guys, for all the color here. A lot's been discussed already in terms of What I would characterize as continuing to be a relatively difficult environment that you guys are managing your way through well. As we look out to calendar 23, I'm not asking for guidance, but just like a framework around how incremental, I think a couple of other questioners have asked about this, the macro is we've talked about past pandemic headwinds and customer You know, Cher and Ron, I mean, you know, now it seems like we're adding extra pressure here. You know, ARR flattened out in the quarter. Is there any, you know, incremental color you can talk about in terms of the pipe, you know, the strong bookings you talked about?

44:25 And, you know, I have a follow-up from Ron. I'll just leave it at that.

44:30 I'll step your words and I'll pass it over to you, Ron. So first thing about ARR flattening or not, let's just be clear that The way we count ARR is based on the actual subscription revenue in a way. It just cleans up for ASC 606 type issues and for perpetual licenses and stuff like that. But it's really, it's not looking into the future. It's not a run rate of booking. It's the effective subscription revenue for the quarter. And so since we know that Q4 is going up, if one would have used kind of a CRR or an end of quarter ARR, obviously it would have been growing. And I'm putting aside the exchange rate impact. So it is in decline because Q4 is expected to be an up quarter, and we have that in pocket. Again, it's not a function of Q4 bookings because Q4 bookings will affect the future, not Q4. So just to be clear that we are continuing to grow, and in fact, like I said, I think in our industry, the only company that I've seen, again, there might be some out there, but the ones that I've looked at that are showing that behavior as soon as Q4 this year insofar as growth. And by the way, if you look at the numbers that are looked there, Given the guidance range we've put, it kind of turns it into a record quarter in the sense of revenue because at the beginning of the year, we had a down because of the single customer and then flat because of the behavior this year, some downs and flats, depending if you look at subscription or total.

45:46 Now it's coming up and guided to be actually a top record revenue quarter compared to Q3 the year before, which was the last record. So we're coming back to be finally to higher revenues. The question still remains, will that continue into next year and what's the graph looking like? It's early to say. It's early to provide guidance. We're looking at the tailwinds. We're looking at the headwinds. We've said there's both. We are armed with great products and additional things that we've done this year that are building a stronger pipeline. I just mentioned that the majority of our ENT sales are added through the types of events that we're referring to as events. And they're growing and the pipeline's growing. And I think that to some extent, were recession-proof in some elements around being able to replace multiple vendors, around addressing multiple use cases, around being in places like education and immediate telecom, not just in enterprise.

46:38 So I'm hoping things are going to do well. I'm also encouraged that risk retention is holding up. And so while there's a short-term pressure on NDR given the comp here, it is expected to turn around. But it's too early for us, and we're not jumping to conclusion, and we're also not overly happy and ecstatic. It's been a very tough year, and the results we have right now are not indicative of the results that we're hoping, planning, and expecting to have in the future. But we're taking it one day at a time, and the other thing we're doing is making sure that we are balancing the company, balancing profitability, and balancing cash flows. Go ahead, Yvonne.

47:12 Yeah, I think that in terms of looking on next year, the encouraging part, as Ron mentioned, is the fact that the gross retention is still strong and we don't see too much pressure on this line item. Also, I'm not sure what's going to happen with the currency exchange that for the last three or four quarters had a negative impact on us due to the fact that we have a pretty significant part of our revenue coming, especially by the way in media and telecom, Coming from Europe, and Europe started with 1.15 the year, and now it's around 1. By the way, it's closed the quarter much below, so please going into Q4, we see some improvement. The big question is obviously if the growth that we are seeing in Q4, the sequential growth, how much of it will continue into next year? If it's going to stay flat, basically it's going to be a

48:12 Something like a similar year in terms of the growth rate.

48:15 So can we assume that booking will not generate additional revenue for next year? It's a conservative assumption, and maybe it's going to happen by the end of the day. But at the same time, any additional booking will start to push the numbers above where we closed it this year. And we have to see what's going to happen with the currency exchange. and obviously with gross retention, which is still strong. So it's a mixed bag situation, but we do feel that the conservative scenario is what we see right now, but obviously yet to be seen. We will be very thoughtful, and against it, we are going to manage our bottom line in order to meet our targets.

49:02 Yeah, that's a perfect segue, Yaron. In terms of my follow-up, Very clear in terms of your guide for the single digit loss of Viva Da into 4Q23. And then you just added to it there in terms of your prudence on the top line. That's loud and clear and strong relatively. How is gross margin looking at? You know, we're having that update, I don't think, on this call about, you know, we talked about in prior calls, mixed shifts, scale, and M&T. Obviously, you know, I don't know how new self-service offerings would impact the gross margin. How should we expect gross margin to trend into next year as we look ahead? Thank you.

49:44 Yes, so obviously you saw that in ENT, basically it was flat gross margin in this quarter. By the way, despite the fact that we have pressure on top line, which, by the way, in our case, gross margin impact mostly the top line. Currency exchange impact mostly the top line. And therefore, it has some negative impact on gross margin. In MNT, we saw some pressure on gross margin. Some of it came from the fact that we have a one-time drop in revenue in M&T, which looking into Q4, it's going to balance itself and actually going to turn around. So the same level of expenses, but we had this short-term decline in media and telecom, which, by the way, related to the fact that some of the revenue recognition light item in media and telecom is a project base, and we had some catch-up in Q2. It went a little bit down in Q3, and we already see the situation that it's coming back.

50:48 Also, most of the impact from the currency exchange is in media and telecom, and therefore you see the pressure on top line, which creates a pressure on gross margin. But looking on next year and going into the future, We started the year, or last year, with the low 60s. Now it's in the mid-60s. It's almost the same on a quarterly basis. We do believe that we will still see some improvement coming mostly from media and telecom, and from two main reasons. First of all, as we mentioned before, it's going to be less professional services, and you already can see that the percentage of revenue we do see a decline in in professional services compared to the overall revenue.

51:37 So this is a losing line item in terms of gross margin, and it's going to be much, much smaller. And also the efficiency that we are implementing in media and telecom will continue to push the number high. Looking for next year, we definitely see a continuing improvement in gross margin, which will come mostly for media and telecom. I don't see a significant improvement at this point We said all along that for the long term, we do believe that we started as a public company for low 60s. We say that at the end of the year, we'll bring it to mid-60s.

52:23 And for the long term, we always say that we believe we'll be able to take it all the way to the 70s. We've come to the end of our Q&A session. I will now turn the call over to Ron for closing remarks.

52:42 Thank you all for making time and for your great questions. Looking forward to a strong quarter ahead of us. Be well and stay healthy. Take care. Bye-bye. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.