KLDiscovery Inc

OTC:KLDI

Earnings Call Transcript

[Operator]

Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the KLDiscovery First Quarter 2023 Financial Results Conference Call. Today's conference is being recorded. [Operator Instructions] Thank you.

And I will now turn the conference over to Dawn Wilson, Chief Financial Officer. You may begin.

[Dawn Wilson, executive]

Thank you, operator. Welcome to KLDiscovery's Q1 2023 Conference Call.

Today's call contains forward-looking statements. These statements are not guarantees of future performance. Actual results may differ materially from these forward-looking statements due to assumptions, risks and uncertainties that are described in more detail in our earnings press release issued yesterday and filings with the SEC. KLDiscovery undertakes no obligation to amend, update or clarify these forward-looking statements made as of today, unless required by law.

During this call, we will also present non-GAAP financial measures, such as EBITDA and adjusted EBITDA, which were not prepared in accordance with GAAP. Reconciliation to the most directly comparable GAAP measure to the non-GAAP financial measures are shown in detail in our press release issued last night, along with definitions for those terms and a discussion of certain limitations. Management believes that our presentation of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations. Our non-GAAP financial measures should only be considered in addition to and not as a substitute for or superior to any GAAP measure.

Please refer to our press release on how to access the replay of this call. I will now turn the call over to our CEO, Chris Weiler.

[Christopher Weiler, executive]

Thanks, Dawn, and thanks for joining us today for KLDiscovery's First Quarter 2023 Financial Results Conference Call. My name is Chris Weiler, and I am the CEO and Co-Founder of KLDiscovery.

In March, we reported outstanding Q4 2022 results, and we knew that Q1 was off to a great start. I'm now proud to report that Q1 2023 was [Technical Difficulty]

[Operator]

Please stand by as we reconnect our speaker. And we have Mr. Weiler reconnected.

[Christopher Weiler, executive]

Apologies. I am now proud to report that Q1 2023 was yet another record quarter for KLD as the team continues to deliver stellar results.

As KLD continues to build an incredible culture of hard-working, dedicated global professionals committed to excellence, we are also executing on our multifaceted strategic plan and consistently achieving our quarterly strategic goals across all departments. The work and capital required to integrate our global corporate business systems, develop Client Portal and constantly improve our Nebula ecosystem is paying off. And we have begun the year as 2022 ended with great momentum and improvement in revenue and adjusted EBITDA.

In the first quarter of 2023, we delivered the highest revenue quarter in company history with $90.7 million, which is an 11% increase over our revenue from the first quarter of 2022 and a 6% increase over our previous record quarter, Q4 2022. Our strong revenue momentum is also reflected in our bottom line. Our net loss in the first quarter of 2023 was also a record low as we reduced our net loss to $4.5 million. This is a 53% improvement year-over-year.

Our Q1 2023 EBITDA of $18.2 million was in line sequentially with the fourth quarter of 2022 and was up 61% compared to the first quarter of 2022. Adjusted EBITDA of $20.9 million in the first quarter of 2023 represents a 49% increase year-over-year for Q1 2023 versus Q1 2022, is another all-time high for the company and marks the second quarter in a row with adjusted EBITDA greater than $20 million. Our Q1 2023 adjusted EBITDA margin of 23% is also a 34% improvement over Q1 2022.

While these incredible results speak for themselves, I'm equally pleased with the strength of our earnings and sales pipeline. 90% of KLD's revenue comes from our legal technology business on a reoccurring usage-based model. We are a trusted partner to many large blue chip clients with an average tenure of 15 years within our top 25 clients.

And we have quickly become a household name in the industry with a sterling track record of successfully handling the largest and most complex of matters, such as regulatory and cyber incident response engagements. Customer feedback gathered by independent third-parties shows a very high level of satisfaction, which is a positive reflection of the efforts our team puts forth daily to wow our clients.

Our document review business continues to perform exceptionally well with Q1 2023 results up 17% over Q1 2022. As KLD continues to build upon its strong reputation for excellent performance during high-value engagement, we expect our differentiated technology-enabled review offerings to remain a cornerstone of our value proposition. We are well positioned to win new market share as well as grow our existing relationships to repeat business fueled by service excellence, quality execution and technological strength.

Speaking of KLD technology, I continue to be very excited about Nebula, KLD's fully integrated, end-to-end eDiscovery review solution. Nebula is already highly valued by our clients as it offers a streamlined, practical platform to meet key needs without adding complexity. We are aggressively enhancing that value proposition as we execute our strategic development road map and continue to adding features that allows Nebula to become the solution of choice for large and complex matters. Adoption rates and growth potential are evidence of Nebula's financial results. For the second quarter in a row, we achieved our highest revenue quarter for Nebula with revenue up 34% compared to Q1 of 2022.

Our Client Portal has also been an absolute success for our clients. Our clients can access critical case and financial metrics across the EDRM, including up-to-date reporting on the current period work-in-progress spending and overall project-to-date costs relative to budget. We are very close to making Client Portal available to our European clients, and we'll be adding new and valuable features to this each quarter as we look to position this as an indispensable case and portfolio management tool for our clients.

This type of holistic business intelligence platform truly is the unicorn in this industry and is the result of millions of dollars of investment in our corporate business systems integration as well as years of operational and project management, systems integration and process development.

In addition to being the backbone to our Client Portal, KLD's advanced corporate business systems are also a key component to our recently announced Franchise Program. For anyone who hasn't seen that announcement yet, KLD's Franchise Program makes our business model and proprietary technology stack available to entrepreneurs in the eDiscovery space.

The global eDiscovery industry is still extremely fragmented with large opportunities for companies like KLD to increase market share. eDiscovery has always been an attractive market for serial entrepreneurs, and we believe KLD is the perfect incubator for not only seasoned business owners, but also the next generation of entrepreneurs who are ready to take the next step and invest in themselves.

We also believe that many existing boutique organizations such as computer forensic, cyber incident response and language translation businesses run across numerous eDiscovery opportunities each year and have to turn down these projects due to lack of business systems to handle eDiscovery and the expertise required to complete these projects in-house.

Through KLD's Franchise Program, these companies are immediately prepared to handle their clients' work through one of the largest and most respected eDiscovery companies in the world. This bold new avenue for revenue growth is a unique opportunity for KLD to capture a larger portion of our fragmented industry and adds yet another growth lever to an already dynamic path of revenue and earnings growth.

We have clearly developed a key competitive advantage over other providers by developing our fully integrated and comprehensive proprietary technology, providing world-class, 24/7, 365 client service and technical support for large complex cases and by creating a brand-new revenue opportunity via our Franchise Program.

As more clients adopt Nebula across the globe and we continue to grow our proprietary technology advantage with strategic investments, we expect to opportunistically seize every opportunity for revenue and margin growth in the areas of technology sales, Client Portal adoption, cyber incident response and regulatory services and our recently announced Franchise Program.

As KLD moves into Q2, momentum is in our favor as we continue to execute our strategic plan to strengthen the company. I believe that as the economy recovers, we will be in a greater position to continue to grow profitably, invest further in the business and remain committed to customer excellence.

I will now turn the call over to our CFO, Dawn Wilson.

[Dawn Wilson, executive]

Thank you, Chris. As Chris mentioned, Q1 2023 was an outstanding quarter as we achieved excellent top line and profit margin results and continued the momentum from our strong Q4 2022 quarter.

Our first quarter 2023 revenue of $90.7 million was the highest revenue in our history and was up 11% compared to the $81.9 million revenue of the first quarter of 2022. Nebula generated $8.2 million in the first quarter of 2023, up 34% compared to the first quarter of 2022.

We have continued to seek operating efficiencies focused on reducing costs and improving our profitability, and we are seeing the results of several years of hard work. Our Q1 2023 net loss of $4.5 million was a 53% improvement from Q1 2022 net loss of $9.6 million.

Q1 2023 EBITDA was $18.2 million compared to Q1 2022 EBITDA of $11.3 million, a 61% increase. We posted our second consecutive quarter of adjusted EBITDA over $20 million with Q1 2023 adjusted EBITDA of $20.9 million compared to Q1 2022 adjusted EBITDA of $14.1 million, an increase of 49% year-over-year. Q1 2023 adjusted EBITDA is the highest in our history.

As Chris mentioned, we are excited about our recently announced new Franchise Program. We are still in the nascent stages of offering this opportunity to entrepreneurs in the eDiscovery space and will keep you posted as we have further developments. Liquidity is strong as our cash and cash equivalents were $26.3 million on March 31, 2023, and we have nothing drawn on our $40 million revolving credit facility.

In closing, the momentum we saw in 2022 continued into 2023 as we started the year with outstanding financial results with all-time highs in quarterly revenue and adjusted EBITDA, combined with a significant reduction in net loss. Because the macro environment is still uncertain, we are continuing to not provide guidance for 2023 at this time. We are thrilled with our strong financial results, which reflect years of cost-cutting efforts, innovation and strategic investments. We will continue to be diligent and agile and build upon our strong foundation.

I will now turn the call back over to Chris for final comments.

[Christopher Weiler, executive]

Thanks, Dawn, and thanks, everyone, for joining us this morning for our conference call. And I'd like to thank the KLD global family for everything that you do. Second to none, you guys are a fantastic group, and really appreciate all the efforts that you put forth every day. Go KLD when you need fingerprint, and we'll be talking with you soon. Thanks.

[Operator]

Ladies and gentlemen, this concludes today's conference call and we thank you for your participation. You may now disconnect.