Kaltura Lacks the Profitability to Perform in the Long Run

Kaltura (NASDAQ:KLTR), the Israeli on-demand video products company, has filed for an initial public offering (IPO). Kaltura is offering 23.5 million class A common stock, 17.4 million shares issued by the company and 6.1 million shares). The target price range is $14 to $16 a share. The company will have 123.1 million shares outstanding after the IPO. If the company meets its pricing target, it will be valued at between $1.7 billion and just under $2 billion. 

Kaltura’s mission is to “power any video experience, for any organization,” and in doing so, it joins AMC Entertainment Holding (NYSE:AMC) in that space. It has over 15 million authenticated users of its products and solutions. Kaltura is trusted by its users to host meetings, webinars, and town halls. Its lecture capture technology is widely praised and it is a rising power in the video software industry offering family friendly things to do the world over. Of its 1,000 customers, 25 are Fortune 100 companies, and more than half are from the education sector, including 7 of the 8 Ivy League schools.

In its S-1/A filing, we see a picture of a company whose growth just exploded during the coronavirus pandemic. In a sense, this is not surprising given how well firms like Zoom have done since the pandemic began. The shift to digital and remote work and remote education has accelerated during the pandemic, to the benefit of many firms such as Kaltura. Data from Research and Markets forecasts a compound annual growth rate (CAGR) of 16% over the next five years. 

Kaltura’s revenue growth precedes the pandemic. Since 2018, revenue growth has been on an incredible run. That in a $55 billion addressable market is enough to ensure that in a market fixated on growth, a company like Kaltura will be of interest to many investors. 

At a time where there is a scarcity of growth, and low interest rates are the new normal, fast-growing businesses such as Kaltura’s will be bid up on IPO even in the absence of profits. 

Financial Results

Kaltura was founded in 2006 and just last year, had raised over $166 million, crossing the $100 million annual recurring revenue (ARR) mark. The company earned $97.3 million in revenue in 2019 and $120.4 million in 2020. 

During the pandemic, Kaltura had double digit revenue growth per quarter, peaking at 30% year-over-year in Q4 2020 when the company earned $35 million. 

The company boasts gross margins in the 60% range and until the pandemic began, has been growing at approximately 25% year-on-year.

Kaltura’s revenues are a good indicator for the long-term. According to research by Professor Jay Ritter, companies with revenues of over $100 million before their IPO perform best, with their share prices growing an average of 42.8% in the following three years. 

The company’s GAAP net loss rose appreciably year-over-year, from $15.6 million on revenue of $97.3 million in 2019 to $58.8 million on revenue of $120.4 million in 2020. However, the company’s underlying numbers are better: Kaltura has had a positive adjusted EBITDA in 2019 and 2020. Adjusted EBITDA in 2019 was $4 million and $4.3 million in 2020. 

The company’s lack of profitability, at least at the GAAP level, follows a larger pattern among IPOs. 83% of IPOs in 2018 were unprofitable in the year prior to IPO. The scarcity of growth in the economy has made growth a very precious and therefore highly valued thing. The combination of growth and a large addressable market, both of which Kaltura has, is enough to ensure that the company will, in the short-term, do well on the market. The market has forgotten about the importance of profitability such that profitability only seems to matter when it exists, as with Zoom, for example. In the short run, investors need not worry about the firm’s performance on the market, however, in the long run, that picture changes markedly. After the three years following IPO, profitable firms outperform unprofitable ones by an average of 6% per year. 

Conclusion

The company is growing fast enough, and has margins rich enough to suggest that in the future it could become a great investment. You could halve margins and revenues and still have a great company. However, its lack of profits and seeming inability to bring those down, is a concern. Benjamin Graham liked to say that, “In the short-run, the market is a voting machine but in the long-run, the market is a weighing machine”. In the short run, Kaltura will certainly prove very popular on the market, but in the long run, shareholder returns follow earnings, not revenue growth. It might be argued that Kaltura is headed in the right direction, but, the future is not a place at the end of a straight line between now and then.