Q4 2023 KLDiscovery Inc Earnings Call

Participants

Dawn M. Wilson; CFO; KLDiscovery Inc.

Chris Weiler; Co-Founder, CEO & Director; KLDiscovery Inc.

Presentation

Operator

Good morning, my name is Brianna, and I will be your conference operator today. I'd like to welcome everyone to the KLDiscovery Q4 2023 financial results conference call.(Operator Instructions) As a reminder, this call is being recorded. I will now turn the conference over to Dawn Wilson, Chief Financial Officer. You may begin.

Dawn M. Wilson

Thank you, operator. Welcome to scale discoveries Q4 and full year 2023 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. Scale. 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 non-GAAP financial measures to the most directly comparable GAAP 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 provide useful supplemental information to investors regarding our results of operations are non-GAAP financial measures should only be considered in addition to and not in isolation from or as I said, 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.

Chris Weiler

Thank you, Dawn, and thank you for joining us today for KLDiscoveries Fourth Quarter and Full Year 2023 financial results conference call by name is Chris Weiler at oil in the CTO and Co-Founder of fuel oil discovery. I'd like to begin by saying I'm so thankful to be working with your emerging here. You'll do team of professionals from around the globe. They have made all the success we have seen to date possible. With their dedication and commitment to excellence. Our team provides unmatched world-class 24/7, 365 customer service, coupled with our innovative technology platform delivered through tools such as Nebula or client portal and our growing suite of AI tools.
This powerful combination of people and technology creates an unbeatable value proposition that is making a difference to our existing clients as well as attracting new clients around the world. While our performance speaks for itself, it bears highlighting the 2023 was a landmark year for cable discovery. We made tremendous progress. Executing on our many strategic initiatives, which translated into record financial results for strategic decisions that we have made been implemented over the past several years have resulted in increased customer satisfaction and usage as well as excellent financial results with increased revenue and margins scale.
The technology is not only driving more client visibility. It is also benefiting margins by providing the platform that reduces the level of people supporting the different mundane tasks, freeing up time for our client service team to focus on servicing the strategic needs of our clients. Great example of this is our flagship eDiscovery platform. Nebula Nebula brings for EDRM. covers to customers demand high performance solutions at every phase of discovery. Nebula continues to capture new customers and is rapidly becoming the preferred solution from many of our existing customers. In addition to experiencing a significant growth and adoption amongst our client base, Nebula is also driving financial results and is becoming a significant part of our revenue and profitability.
Our record-breaking revenue in 2023 was bolstered by strong contribution from Nebula, which generated $46.1 million, which includes $14.2 million for Nebula processing services for non Nebula hosted engagements, 2023 Nebula revenue was up $17.6 million or 62% compared to 2022 momentum for nebulous. Strong Nebula revenue for Q4 was $14.1 million, up 74% over Q4 2022. Overall nebulized now 13% of tail discoveries. Total revenue, the momentum KLD. has created within the marketplace. As your receivable in 2023, we saw an increase in large matters has 52% of Legal Technology revenue came from matters with generated revenues of $500,000 or more. This is an increase from the 47% in 2022. Our net revenue retention rate for Legal Technology was 104%. We delivered outstanding results for the full year of 2023, setting all-time company records with our highest revenue of $345.8 million flow as net loss of $34.8 million, our highest EBITDA of $62.6 million and highest adjusted EBITDA of $74 million.
Overall, the fourth quarter of 2023 was one of our best quarters ever as we delivered solid revenue of 85% sequentially compared to the third quarter of 2023 by strong revenue growth is positively impacting the bottom line. These results are no accident our performance in 2023 as a result of what we believe is a winning strategy being well executed by our global team of professionals. As a result of our investment in technology, back-end infrastructure, optimization of headcount and real estate footprint, we create a scalable infrastructure with margins that increased as revenue increased. Both our full year gross margin and adjusted EBITDA margin expanded in 2023. We've known this for years for the market is finally catching on. Nebula is a premier eDiscovery platform that definitely balances ease-of-use and powerful functionality to create an unmatched user experience.
Comparing 2023 to 2022, the number of Nebula matters has grown 17%. While active data posted is up 32%, active users are up 13%, while those numbers are while those growth numbers illustrate nebulous traction there toward by nebulous impressive financial results. As I mentioned a few minutes ago, Nebula continues to be a massive growth driver for the company with year over year revenues of 62%.
As proud as we are of nebulous growth thus far, the best is still yet to come. We continue to invest heavily in that nebula and artificial intelligence that empowers the user experience like never before. Nebula existing AI machine learning toolkit will soon be greatly enhanced by updated models and improve workflows. New AI features are slated for release in 2024 and 2025 to further solidify Nebula as an eDiscovery powerhouse.
Many of these product initiatives are the results of years of dedicated, a our research that we've been prioritizing since 2019 years before the latest wave of Gen AI. hype. Additional 2024 Nebula road map highlights include entirely new authentication system with support for new single sign on protocols and additional multifactor authentication options. Promotions have data from Nebula processing ACA to third party platforms for greater optionality across our network of vendors and partners, data source connectors and improves the handling of chat and business communications data such as Teams, Slack and Zoom Chat, re-architected ingesting pipeline to dramatically reduce the time from upload to review and many quality of life improvements on the review and production side of the EDRM., in addition to the the aforementioned AI. enhancements.
As we look ahead, nebulous reach is only going to continue to expand with it being a state-of-the art platform that would be the interface for kale discoveries, many JNAI. initiatives. By the way of background, we have dedicated a I data science team since 2019 with over 17,000 hours, R & D invested into scale these current and future AI. offerings. Recent innovations and foundational AI. has spurred massive opportunity for technology providers and software platforms. Like Nebula, we are well positioned to capitalize on these state-of-the-art advancements and productize them in ways that drive real results for customers. While others may rush to incorporate large language models in any way possible. Our focus is always on practical solutions that deliver quantifiable value. This approach is reflected by not only our key AIM. and L. initiatives, but also our larger Nebula development roadmap, of which AI ML initiatives are critical part.
While we are very excited what reason and in future AI innovations may bring to the industry, the general consensus is that the adoption of JNAI. solutions will be conservative. Considerations around cost scalability, legal ramifications, privacy and ethical implications must all be carefully weighed by law firms and counsel. Like regardless with time line plays out, Nebula, EnCase eDiscovery are poised to more be market leaders in software and services. Respectfully. Moving on, I would be remiss if I didn't talk about scale discoveries, client portal.
I've always seen this tool as a catalyst to evolve the customer experience, and I am bullish as ever about the impact is having on our clients with real-time visibility and complete transparency into their portfolio of matters. We believe our clients have an unmatched level of business intelligence with scale discovery. In Q4 of 2023, we released our one-of-a-kind alerting feature that proactively and forms uses of critical data points around budget attainment, work in progress and sudden changes of matter activity. We've recently enhanced functionality to include a series of defaults alerts automatically installs for every client portal user to help take the guesswork and surprises out of eDiscovery.
Another inflection point for kale discovery occurred in Q4 of 2023 when we acquired Senza, an established global ALSP. from India serving clients in the US and UK, with scalability, cost-effective and reliable managed legal services built on best in class technology, offering deep operational expertise, rigorous quality control and robust client service. This acquisition immediately gives us a mature India operation to expand our best in class solutions, including our secure manage document review and cyber incident response offerings. This combination also allows us to expand contract management solutions by blending consulting advisory, project management, hosting and legal AI. with lawyers in the loop we believe is toehold in India, affords us countless opportunities to drive business results while also enhancing top and bottom line financial performance.
Lastly, I'd like to provide an update on our one-of-a-kind eDiscovery franchising program. We are proud to announce that we are now approved in all 50 states to offer eDiscovery franchise opportunities. As a reminder, tail discoveries franchise program leverages the Company's proven e-discovery business model, Globe footprint around the clock client support and full technology stack to create a point of entry for Legal Technology, entrepreneurs and adjacent businesses across the country to establish an e-discovery business. With this program now available nationwide.
We're seeing tremendous interest in our quickly booking appoint that's for upcoming multi-city franchise roadshow that we plan to conduct later this year. I continue to be amazed at how KLD continues to operate in an extremely high level despite challenging market conditions. While our results are remarkable and a true testament to our team and their dedication to excellence, the real excitement lies and looking ahead, we have proven our ability to execute in our strategy positions us for continued success. Our technology is already best in class and we believe is only going to get better. Our franchise program is no longer geographically constrained in the U.S. and provides tremendous potential for net new revenue opportunities. We are now operating in India, bringing a wealth of possibilities not previously available to us. I am more optimistic now than ever before about our direction and the possibilities before us with our great team, loyal customers, purpose-built technology and a sound strategic vision. The wind is truly at our backs as we head into 2024 for to our CFO, Don Wilson.

Dawn M. Wilson

Thank you, Chris. We achieved excellent financial results from the fourth quarter and full year at 2023. For the full year of 2023, we had our highest revenue relative to net loss, higher EBITDA and adjusted EBITDA, while improving gross margins and adjusted EBITDA margin compared to 2022 . Revenue in the fourth quarter at 2023 rigs, $85.8 million, which is on par with $85.8 million in the fourth quarter of 2022. For the full year 2023, revenue was $345.8 million compared to $317.4 million in 2022.9% increase. Legal Technology revenue for the full year increased to $312.5 million from $282.8 million in 2022, 11% increase here every year. Our growth and Legal Technology revenue due to increased Nebula grant, increased number of customers, increased number of matters and increased revenue from complex matters .
Our comprehensive product offering, technology-enabled service offerings and reputation as a trusted partner to our clients enable us to capture. Matt, there's a large size and complexity during the years ended December 31st, 2023 and 2022 52% and 47%, respectively. Of Legal Technology revenue was produced by manners that generated revenue greater than $500,000, 79% and 77%, respectively. Of our Legal Technology revenues were generated by matters greater than $100,000. Additionally, we saw an increase in our Legal Technology net revenue retention rate to 104% by 2023 versus 94% for 2022, indicating continued growth from our investing long tenured customer base. Nebula continues to guide Legal Technology revenue growth, delivering revenue of $46.1 million. That's inclusive of $14.2 million for Nebula processing services for nonmobile efforts and engagements for 2023, with year-over-year revenues up 62% and Q4 '23 reps revenues up 72% as compared to Q4 2022.
Nebula revenues are currently 13% of our total revenues. We have a strong track record of growing our client base. We believe our ability to increase the number of clients utilizing Nebula is an important indicator of our market penetration. Our business strength in our future opportunities for a number of Nebula clients increased to 1,673 VERSUS1,593 as of December 31st, 2023 and 2022, respectively. Additionally, as Chris discussed, we have seen tremendous growth in key Nebula utilization metrics, including number of users. Number of matters, massive data hosting Nebula continues to gain traction.
Our strategy to focus on managing costs while still investing in our technology, continues to deliver positive results. Net loss improved 19% for the full year '23 compared to '22. Net loss was reduced from $43.2 million $34.8 million in the fourth quarter of 2023. Net loss was $14.3 million compared to $5 million in Q4 2022. Ebitda and adjusted EBITDA results offers us significant gains for the full year of 2023, up 41% and 27%, respectively compared to 2022. Q4 2023 EBITDA was $12 million compared to Q4 2022 EBITDA of $18.3 million in Q4 23. Adjusted EBITDA was $17.2 million compared to Q4 and '22 adjusted EBITDA of $20.4 million. Additionally, our gross margin improved significantly. Different movement in margin comes from years of investment in technology and improvements and back-end infrastructure, optimization of headcount and real estate. High liquidity includes our cash and cash equivalents, which were $15.4 million on December 31st, 2023, and we had nothing drawn on our $40 million revolving credit facility as at December 31st, 2023. As of today, we are $15 million drawn on the revolving credit facility. In closing, we are very happy with our strong financial results for the fourth quarter and the full year of 2023 as our team at KOB. continues to perform and does a great job every day. As always, we will continue to be diligent, agile and build upon our strong foundation and momentum. I will now turn the call over to Chris for us. Final comment.

Chris Weiler

Thank you, Dan. I just wanted to thank everyone for their time this morning. And again, thank the KLD global family for all that you do every day, your amazing. And so I'm really proud of the efforts that you did and the accomplishments of 2023.

Operator

This will conclude today's conference call. Thank you for joining us. You may now disconnect