KLDiscovery Q2 2024 Earnings Call Transcript

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August 8, 2024

Key Takeaways

  • Total Q2 revenue was $79.0 million with Nebula platform revenue up 51% year-over-year, underscoring the platform’s growing contribution.
  • Legal technology client count rose 1.4% to 6,239 and Nebula clients increased 3% to 1,708, with net revenue retention at 90%, indicating steady market penetration and customer loyalty.
  • A capital restructuring transaction supported by debenture holders and lenders is expected to close in Q3 2024, significantly reducing long-term debt and interest obligations to strengthen the balance sheet.
  • The company reported a net loss of $25.3 million in Q2 and a negative GAAP EBITDA of $0.5 million, highlighting ongoing profitability challenges.
  • KL Discovery is expanding Nebula into high-value regulatory engagements (DOJ/FTC second requests) and medical record management, and plans to add automated invoicing to its client portal in Q3.
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Earnings Conference Call
KLDiscovery Q2 2024
00:00 / 00:00

There are 3 speakers on the call.

Operator

Good day, everyone. Welcome to KL Discovery's Q2 2024 Financial Results Conference Call. At this time, I would like to hand the call over to Ms. Dawn Wilson. Please go ahead.

Speaker 1

Thank you, operator. Welcome to KLA Discovery's Q2 2024 conference call. Today's call contains forward looking statements within the meaning of the federal securities laws. 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.

Speaker 1

Kale Discovery 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 of the non GAAP financial measures to the most directly comparable GAAP measure 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 in isolation from or as a substitute for or superior to any GAAP measure.

Speaker 1

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 Wyler.

Speaker 2

Thank you, Don, and thank you all for joining us today for KL Discovery's 2nd quarter 2024 financial results conference call. My name is Chris Wyler and I'm the CEO and Co Founder of KL Discovery. As always, I'm grateful to our industry leading team for their hard work and continued dedication to bringing our strategic vision to life and delivering innovative solutions and stellar service to our entire global client base. Our financial results year to date demonstrate KL Discovery's ability to generate meaningful revenues. For the Q2 of 2024, we reported total revenue of $79,000,000 with legal technology revenue of $72,100,000 and data recovery revenue of 6,900,000 dollars As of June 30, 2024, we had 7,650 legal technology matters and 1381 matters under our flagship eDiscovery platform Nebula.

Speaker 2

Importantly, as of June 30, 2024, the number of our legal technology clients increased to 6,239, up 1.4% year over year and the number of nebula clients increased to 1708, up approximately 3% year over year. We have a strong track record of growing our client base and we believe that our ability to continue increasing the number of clients utilizing our solutions is an important indicator of our market penetration, our business growth and our future opportunities. The 12 months ended June 30, 2024, our legal technology net revenue retention was 90%. We aim to further enhance our net revenue retention by boosting the number of subscription based solutions we offer and expanding the range of our Nebula products to drive robust product adoption. As we announced last quarter, we are in the process of finalizing a milestone transaction that will strengthen KL Discovery's financial position by significantly decreasing its long term debt.

Speaker 2

Additionally, we believe the stronger capital structure following the expected transaction will serve to underpin our growth model and focus on investment in our market leading client solutions. Most recently on July 3, 2024, we entered into a transaction support agreement with our convertible debenture holders, firm loan holders, revolving credit facility lender and largest shareholder and an exchange agreement with our convertible debenture holders. Importantly, the signing of these transaction documents reflects the continued strong support of our debenture holders, firm loan lenders, revolving credit facility lender and our largest shareholder who are confident in our prospects and business strategy. The transaction is expected to close in the Q3 of 2024. Our flagship Nebula continues to shine and has become a foundational element of our financial performance.

Speaker 2

Our existing customers are using Nebula more than ever and the platform has also been responsible for attracting an influx of new customers to KL Discovery. Nebula delivered exceptional results in the Q2 of 2024 with platform revenue up 51% year over year, which includes an incremental CAD8.4 million dollars by expanding the use of Nebula processing across virtually all legal technology engagements. Nebula's strong financial results were primarily driven by increased utilization as evidenced by steady growth of both active users and data volumes on the platform. The secret to Nebula's success is simple. The platform creates a model user experience through ease of use, powerful tools on practical solutions and reliability.

Speaker 2

EDiscovery is more complex than ever and balancing complex data challenges alongside legal and regulatory requirements and constrained timelines can be overwhelming for even the savviest of legal practitioners. We believe that e discovery technology should be reliable and make it easier for our clients to do their jobs effectively. We build Nebula with that exact philosophy in mind and has already proven to be a winning strategy. Nebula is making a real difference in the legal community and we expect our roadmap to build on that success and reach even more users whose professions can be changed for the better through Nebula. One notable example of that is in the regulatory space, DOJ and FTC second requests, TCB, SIRs or CMA Phase 2 projects are extremely complex, large scale and high stakes.

Speaker 2

Helping clients navigate the challenges posed by these engagements requires the highest level of expertise, precise execution and technological sophistication. Scale Discovery has established itself as one of only a few trusted providers with the reputation and track record of consistently supporting these high value engagements, resulting in these engagements becoming a key element of our revenue. We've had tremendous success leveraging Nebula for other complex and large scale engagements to date and expect to begin offering Nebula for DOJ and FTC second request in late Q3. With KL Discovery's deep bench of experienced professionals and a revolutionary product like Nebula that is laser focused on meeting the workflow needs of these engagements in the most user friendly and efficient manner possible, we are confident that Nebula will increase its footprint in the regulatory legal community. Another adjacent market Nebula is breaking into is medical record management.

Speaker 2

There are dozens of use cases for medical records and legal proceedings and there are shockingly few solutions available to help address those needs. We are now introducing Nebula into the equation, leveraging our purpose built AI driven solutions to meet these challenges head on. We plan to continue developing and honing this offering within Nebula and expect to see high demand amongst legal professionals who are we believe are desperately seeking better solutions for their medical record needs. On the topic of innovation, I would like to take a moment to highlight our client portal. This innovative solution allows our clients to access critical case and financial metrics across the EDRM including up to date reporting and proactive alerting on the current period work in progress spending and overall project to date costs relative to budget, as well as a host of other critical metrics and KPIs that our clients rely on to manage their portfolio of engagements with KL Discovery.

Speaker 2

In the Q3 of 2024, we expect to make invoices automatically available on the client portal, which has been highly requested by our customers. Finally, we will continue to aggressively market our one of a kind franchise offering. We have been encouraged by the market's response to this offering so far, particularly among seasoned entrepreneurs looking to start their next venture and existing businesses operating adjacent to eDiscovery. Supported by a significantly strengthened financial position resulting from the expected closing of our capital restructuring transaction, we plan to bring our franchise offering even more qualified individuals and grow this aspect of our business. The avenues we discussed today are only part of our company's dynamic growth strategy.

Speaker 2

Overall, our focus remains squarely centered on our clients and pushing forward with the exceptionally high levels of innovation and service quality that they have come to expect from KLD. This quarter, we made significant strides in our core strategic initiatives as we continue to expand nebulae utilization and the adoption of our subscription based solutions. We believe these efforts have positioned us to better serve our clients and enhance our revenue growth trajectory. Looking ahead, KL Kale Discovery is poised for continued success with a clear vision for the future. We've reinvigorated by the continued positive response from our clients, which reflects our strong market position and the value of our solutions.

Speaker 2

Our global team, seasoned and resilient, is more motivated than ever to drive our objectives forward, Coupled with the expected post transaction reinforced financial foundation, we believe we are well equipped to execute our strategy and deliver on our vision. We remain committed to leveraging our robust technology platform and global reach to capitalize on growth opportunities and enhance shareholder value. We're confident that our approach will enable us to navigate the evolving e discovery landscape effectively and achieve our long term goals. I will now turn the call over to our CFO, Dawn Wilson.

Speaker 1

Thank you, Chris. For the Q2 of 2024, we reported total revenue of $79,000,000 with legal technology revenue of 72 $100,000 which includes Nebula revenue of $14,100,000 and data recovery revenue of 6,900,000 Nebula continues to drive legal technology revenue growth, delivering revenue of $28,800,000 year to date June 30, 2024, which includes an incremental $8,400,000 for Nebula processing services for non Nebula hosted engagements. Nebula revenue growth was 51% over year to date revenues as of June 30, 2023. Year to date June 30, 2024, Nebula revenues are 18% of our total revenues. Net loss was $25,300,000 for the Q2 of 2024.

Speaker 1

Q2222024 EBITDA was negative $500,000 while Q2 2024 adjusted EBITDA was 13,300,000 dollars Our liquidity includes our cash and cash equivalents, which were $33,800,000 on June 30, 2024. As of today, we have $38,000,000 drawn on the revolving credit facility. As Chris mentioned, on July 3, 2024, we entered into a transaction support agreement with our convertible debenture holders, term loan lenders, revolving credit facility lender and largest shareholder, and

Speaker 2

an exchange agreement with our convertible

Speaker 1

debenture holders. This will provide a agreement with our convertible debenture holders. This will provide a significant reduction in our long term debt and costly interest rate payments as we strengthen our balance sheet and reinforce our financial foundation with a bolstered financial position and deleveraged balance sheet. In closing, we continue to be diligent, agile and build upon our strong foundation and momentum as we look forward to completing the restructuring of our convertible debentures. I will now turn the call back over to Chris for final comments.

Speaker 2

Thank you, Don, and thanks everyone for joining the call this morning. Go KLD, 1 unique Seaprint, very excited about our future. And thanks for joining.

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