Kaltura (NASDAQ:KLTR) went public last July at $12 per share. Since its IPO the stock has been plummeting non-stop. The stock is now down almost 90% from its IPO price trading at $1.39 per share. Part of the reason for this drop is caused by the massive dump of high growth stocks amid rising rates and economic uncertainty. Another reason is that the company’s prospect is very weak. It is facing strong competition from the likes of Zoom (ZM), Microsoft (MSFT), Cisco (CSCO), etc. Its financials are also a disaster with growth decelerating and loss widening. I believe the stock is a sell even though it is down 88% as fundamentals remain very poor and no improvements are seen throughout the last few quarters.
Kaltura is a US-based software company founded back in 2006 by Ron Yekutiel, who is also the current CEO. It provides video solutions for enterprises to communicate with customers. It offers live, real-time, and on-demand video products for industries such as education and media. Its product can be used for video conferencing, creating virtual classrooms, capturing lectures, live broadcasting, and more. Its main product includes:
- Virtual Events
- Town Hall
- Video Portal
- Video Meetings
Virtual Events allow customers to create, manage, and measure all events on a single platform using customizable templates for different needs. It offers both pre-recorded and live events with simple registration and post-event analytics.
Town Hall provides end-to-end live streaming for company town halls, international conferences, etc. It allows companies to go live anywhere easily with interactive capabilities such as Q&A, slide sync, and polls.
Video Portal is a center that stores all the videos and can be accessed by everyone in the company. It allows users to edit, organize, and publish these videos easily in one place.
Video meetings provide a space where everyone can join with one click via a single link. It offers collaboration tools like whiteboards, shared meeting notes, chat, and breakout rooms.
The video communication market has expanded rapidly since 2020 thanks to the work from home trend amid lockdowns from COVID. According to Fortune Business Insight, the global video conferencing market is expected to grow from $6.87 billion in 2022 to $14.58 billion in 2029, representing a CAGR of 11.3%. The growth is mostly contributed by the adoption of a hybrid work mode that a lot of companies are now using.
However, the market has already begun to be very concentrated with a few companies dominating. Zoom, Microsoft’s Teams, and Cisco’s Webex basically dominated the space. According to TrustRadius Zoom accounts for 50% of the video conferencing market while Teams and Webex account for 23% and 11% respectively. Combined they already account for 84% of the total market. This resulted in companies like Kaltura struggling to expand. If users want high quality and effective video solution they can choose Zoom, if they want a free or cheaper option they can choose Teams, there is very little space where Kaltura is able to squeeze in.
Kaltura is trying to focus on relatively niche industries such as education and media/telecom. It offers solutions like virtual classrooms and lecture capture for schools and universities. In my opinion, this won’t work in the long run. Unlike enterprise companies, schools and universities are unlikely to adopt a hybrid model in the future which will significantly hurt Kaltura’s revenue. Also, other competitors will also start to enter the space and grab market share as they are able to offer the same solutions as well.
I believe Kaltura will continue to struggle as none of its products are able to differentiate itself from other competitors, this resulted in low market share and low pricing power. Besides, B2B video companies like Vimeo (VMEO) are also starting to offer products like Virtual Events. Most customers are inclined to choose Vimeo over Kaltura as a lot of them are already using Vimeo’s other products and its solution is more complete. Other competitors like Zoom, Microsoft, and Cisco also have a much larger cash position which allows them to invest in R&D and create more new and innovative products that Kaltura may not be able to do.
The company’s growth is decelerating and it is struggling to turn a profit. For the fourth quarter of FY21, the company reported a revenue of $42.7 million compared to $32.5 million a year ago, representing a 21% growth. Gross profit was $26.8 million, representing a gross margin of 63%. Adjusted EBITDA was $(7.7) million for the fourth quarter of 2021, compared to adjusted EBITDA of $1.5 million a year ago. Non-GAAP Net loss was $11.6 million or $0.09 per diluted share for the fourth quarter of 2021, compared to a non-GAAP net loss of $2.3 million, or $0.02 per diluted share. For the balance sheet, its operating cash flow was $(10.7) million compared to $4.1 million a year ago. The company ended the quarter with $144 million in cash and $28 million in debt.
The numbers are not looking good. The growth of 21% is significantly lower than the 40% growth the company posted in the third quarter. Adjusted EBITDA, income, and operating cash flow all turned negative after the tailwind from the pandemic faded. The guidance for FY22 is even worse. It expects revenue to be $173.3 million and $178.2 million, representing a growth of only 5%–7%. Adjusted EBITDA to be negative in the range of $27 million to $32 million, compared to a negative $12.2 million in FY21 and a positive $4.3 million for FY20. It shows that growth is continuing to decelerate quickly and loss keeps increasing. According to Seeking Alpha’s analyst estimate, the company is forecasted to continue reporting negative earnings for the next four years.
Another concern is the number of shares outstanding. The weighted average number of shares increased from 25 million a year ago to 127 million, representing a 5 times increase. Sequentially it also increased by around 25% from 103 million to 127 million. This creates a massive dilution for shareholders while the company stock price is already performing badly.
The company currently has a negative EPS, income, and cash flow therefore we can only value it using the price to sales (PS) ratio. It is currently trading at an FY22 PS ratio of 1.01. This is very cheap for a SaaS (subscription-as-a-service) company, especially when compared to its competitors. The chart below shows the comparison between Kaltura’s valuation against other SaaS companies. From the chart, you can see that even the cheapest company Brightcove (BCOV) is trading at a 40% premium compared to Kaltura, while Zoom is trading at almost a 7x premium. However, this is largely due to profitability issues. All the other companies either have positive earnings or cash flow. Companies like Zoom are very profitable with healthy margins. While Kaltura is forecasted to generate negative earnings for the next 4 years according to Seeking Alpha’s analyst estimate.
In conclusion, the video communication market is now very concentrated with Zoom, Microsoft, and Cisco forming a monopoly with a huge cash position to invest in R&D and marketing. The niche market of education that Kaltura focuses on is also starting to return to normal as it is unlikely that schools will adopt a hybrid model. Its products are all offered by its competitors which leaves no room for market expansion and increasing pricing power. These issues combined basically leave Kaltura with no space to survive in the market. Financials are deteriorating quickly. Revenue growth keeps decelerating with only mid-single-digit growth forecasted for FY22. Net loss also keeps widening and profitability is nowhere to be found. Weighted average shares are increasing at an unreasonable pace which heavily diluted shareholders despite the horrible stock performance. Valuation is definitely cheap at a PS ratio of only 1, but cheap is not enough as the company is struggling fundamentally and financially. Therefore I rate Kaltura a sell even after a 90% drop.