Looking at its founding team - Ron Yekutiel, Michal Tsur, Shay David and Eran Etam - one could assume with almost 100% certainty that Kaltura (Nasdaq: KLTR) would be a phenomenal success. A helicopter pilot from the Air Force. A serial entrepreneur who together with Naftali Bennett sold a startup for hundreds of millions. A PhD in information systems from Cornell University. Plus, one of the founders of ICQ - the first-ever major Israeli exit in the 1990s.
Despite this high-quality team, last week Kaltura published its second quarter results that revealed single-digit growth, deepening losses, and increased burn rate. As part of a restructuring process, the company announced that it would lay off 80 employees, 30 of whom are in Israel. At the end of 2021, the company employed about 760 workers, of which 450 were in Israel. After the reports were published, the share price fell by 10.5% (but rose by 8.4%, as of closing time). It is currently trading $325. 4 million market cap, or just $2.48 per share. So, what are the reasons for the collapse?
From comet to falling star
Kaltura has all the hallmarks of a success story: an Israeli video technology company serving giants like AT&T, Deloitte, Oracle, Bosch, and Reuters. It recently moved offices to the prestigious Amot Atrium tower in Ramat Gan, and was one of the last companies to go public before the stock market IPO window closed in 2021. And if that wasn’t enough, its ad campaign stars actor David Duchovny, who played the mysterious FBI agent Fox Mulder in the TV series, "The X- Files."
But it is doubtful whether the impetus to go public at any cost and make a show of success on the eve of a market collapse has helped the company in the long run. It is also possible the company may have some regrets about going public at a bad time which, in retrospect, exposed it to a hostile takeover and an insulting purchase offer from a tiny competitor called Panopto. In July, Panopto, backed by investment fund K5, offered to acquire Kaltura for $3 per share, or $383 million, a 27% premium compared to the current offer price.
"It’s a high-quality team but they’re simply in the wrong field," says a former Kaltura employee. "The video sector has been hit in recent years and the fact is that very few companies have really succeeded in it. In any other field, they would have flourished."
The company's CEO Ron Yekutiel, an IDF Air Force pilot who founded a navigation company in the past before establishing Kaltura 16 years ago, manages the company with a firm hand to this day. Former employees say that he is "a charismatic, visionary CEO." President and general manager Michal Tsur, is also involved in day-to-day management, but she mainly deals with strategic partnerships.
Eran Etam - one of the founders of ICQ, which was sold to AOL for $400 million - and Shay David, left the company to found new startups. Two years ago, Yekutiel brought in former Panorama CEO Eynav Azaria to manage the commercial side of the company; to this day Azaria plays a dominant role in marketing and sales activities.
Broken dreams
"What happened to the company during and after the Covid outbreak is a tragedy," says a former employee. "But you have to understand that those who know it well and many of those who worked for it still own shares or are buying more shares. We know its potential, and we don‘t believe that it’s indeed worth the value at which it’s trading. There’s no way a company that brings in $150 million a year is trading at a 1.5x revenue multiple."
The same tragedy relates to the company's focus on teleconferencing. Kaltura has developed a video player for organizations - a kind of secure video network that allows huge companies to establish an internal video portal - for example, to present employees or students with training and informational videos, or for salespersons to show product demonstration clips. Later, it developed a video-on-demand streaming system for internal communications. The pandemic was a golden opportunity; as a company providing video broadcast services to the enterprise, it began offering its services to the crowded online marketing events sector.
With the outbreak of Covid-19, the company signed many contracts that increased its growth rate prior to the IPO and for a short period after that. However, as with most companies that rode the lockdown wave with work-from-home services, the recovery from the pandemic brought with it a sharp decrease in growth and increased losses.
The pandemic did stimulate growth of the enterprise video market, but also brought in more competitors, like Hopin, which specializes in virtual teleconferencing, and Vidyard, which caters to salespeople. In addition, because of its decision to serve large enterprises and handle a range of business verticals, Kaltura was overloaded with sales and support personnel, while more nimble rivals offered self-service online at a lower cost.
Zoom, which became a huge player overnight, swept up the enterprise market, and Kaltura had a hard time distinguishing itself. "Zoom created a faster horse. We’re trying to create a spaceship," Ron Yekutiel told Globes almost a year before the IPO on Nasdaq that took place last summer. Since then, however, the two companies have experienced a significant decline in growth. Zoom's stock has fallen by over 70% during the past year and its revenue growth rate has decreased from over 300% during the early days of the pandemic to just 12% in the last quarter.
"It will be forced to merge "
Former employees attest to a healthy organizational culture and loyalty to the organization, at least in Israel, despite feeling that the company is overstaffed.
"Everyone felt there was a need to downsize and that the company was bloated, but not a lot of people left," says a former Kaltura employee.
In all, only 35 employees left the company (in Israel and abroad). The average term of employment at Kaltura is two years, compared to 1.2 years at SimilarWeb, 1.3 at Lemonade, and 1.8 years at Riskified. But indicators of a slowdown in the company's growth were also evident in terms of personnel. According to LinkedIn, employee growth rate had slowed by 3% after rapid growth of nearly 50% over the past two years.
According to Sergey Vastchenok, senior equity analyst at Oppenheimer & Co., the fact that Kaltura sells a complex product to huge organizations generates many costs that lead to losses, despite the broad technological base and the added value to customers. "Kaltura is a small niche company that generates less than $200 million a year," Vastchenok tells Globes. "As such, it will not be able to continue to implement its far-reaching vision, remain independent for the long term, and will probably merge, given the current growth figures and the need to cut its expenses.
"Even if the company doesn’t accept the current purchase offer from Panopto, its managers probably know that it’s better for them to continue to manage the operation as executives of a bigger, more effective company. Similar decisions have been made by many Israeli CEOs in recent weeks."
Kaltura
- Business: Secure video player and video library management system for training videos, marketing videos and virtual conferences.
- History: Established in 2006 in Ramat Gan and New York. Since then, it has raised about $350 million from venture capital funds and foreign (non-Israeli) banks.
- Vital Statistics: At the end of 2021, the company employed about 760 workers. Even before the layoffs, 35 employees had left in the last few months, and the number of jobs posted on LinkedIn decreased by about 30%.
Published by Globes, Israel business news - en.globes.co.il - on August 16, 2022.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.