Q2 2021 KLDiscovery Inc Earnings Call
[music].
Good day and thank you for standing by welcome to BK I'll discuss <unk> Q2, 2021 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your Speaker Dan Wilson. Please go ahead.
Thank you operator welcome to Cal Discovery Q2, 2021 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.
Hey, Al Discovery undertakes no obligation to amend update or clarify these forward looking statements made as of today.
During this call. We will also present non-GAAP financial measures, which were not prepared in accordance with GAAP reconciliation to the most directly comparable GAAP measure to the non-GAAP financial measures discussed on this call, including EBITDA and adjusted EBITDA are shown in detail in our press release issued last night.
Along with definitions for those terms management believes that our presentation of non-GAAP financial measures provide 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 last night's press release on how to access the replay of this call I will now turn the call over to our CEO Chris Weiler.
Thanks, Paul and thank you very much for joining discovery's second quarter 2021 financial results Conference call.
My name is first of all there and I am the CEO and co founder of Keyhole discovery.
We get a lot of new people listening to our calls each quarter. So I'd like to begin with an overview of K L. D. How our clients use our solutions and what makes us truly unique.
<unk> is a leading global provider of electronic discovery information governance and data recovery technology solution.
Help law firms corporations and government agencies and consumers saw complex data challenges.
Over the past 16 years, we have created a battle tested ecosystem.
Software solutions to collect process and host millions of files for our clients every day.
<unk> is one of the largest companies in the industry. We are unique in that we offer a holistic software solution.
Unparalleled proprietary technology and a strong commitment to excellent customer service.
This is a significant point of distinction from our competitors.
The large players in the discovery of New third party technology.
We do not we are the only large player that has developed our own technology and software to create our unique offering that has two distinct review tools nebula.
And Edr.
Our software and technology solutions are built with our customer needs in mind, and we frequently enhance our solutions with features that results from our constant dialogue with our customers.
We do everything to ensure their unique needs.
Needs are met our platform is supported by approximately 200 engineers.
Located in four countries with continued investment to grow that to even larger.
Building and owning our own technology versus licensing allows us to create custom client solutions and grow our long term relationships that allows us to offer attractive pricing to win business, while staying very profitable a true competitive advantage.
This approach is very different from the rest of the Ediscovery industry.
The industry is filled with hundreds of small providers in a small number of medium to large providers that fall into two categories, either make software without providing the associated services and support that fully assist clients or they provide the supporting services, but only through license software.
Either scenario lease clients with mosaic solution that is patched together and not fully integrated we don't see either of these molds and have paid our own path, where we created phenomenal technology backed by World Class service.
We take advantage of our global footprint to its fullest and pre bought it follow the sun support system with living breathing human beings staffed and ready to assist you when you needed the most.
Higher customer service behind chat bots or self help sites, but instead make a wealth of information available to our clients on demand, while simultaneously, making our team available to them whenever they need us. This is just one of the reasons why our customers continue to come back and new clients are attracted to us is our.
Increasing revenue over the last four quarters.
On the streets.
Our end to end technology spans the entire Edr M, which is short for electronic discovery reference model a framework. It outlines standards for the recovery in discovery digital data. This.
This means we can address the requirements of anyone who needs to gather and assimilate electronic data with our technology.
It also increases the total addressable market for our solutions.
<unk> solutions start with information governance.
Is the earliest part of the data lifecycle within the Edr M.
The identification preservation and collection of data and continue to support the other aspects of the Edr and such as processing analysis review and production.
As you can tell prior priority priority proprietary technology is a key differentiator for us and I couldn't be more excited about what we have built and continued to develop since day. One we have made R&D a priority and we continue to invest in our global team of software Engineers, our technology is battle tested and our entire.
Offering work seamlessly together this is a very important distinction.
Another key component of <unk> is our global footprint.
Only operate from 33 locations in 18 countries, giving us the ability to work on complex multinational cases.
Also means we have a larger total addressable market with strong established teams across Europe and Asia.
The scale, we operate an equally impressive we ingest almost a petabyte of data each year, a number that has been growing by 20% a year and host over four petabytes at any given point in time.
Aside from Ediscovery. We're also the largest global provider for data recovery with solutions addressing data recovery Ransomware response email extraction and restoration data destruction, a ratio verification and tape management needs.
Much like E discovery solutions are largely powered by our proprietary technology.
Sparingly leverage third party tools.
So let's talk about our outstanding second quarter. Since 2020, we've invested a lot of time and money in our business I am pleased that even with the increased investments we were able to significantly grow EBITDA by 31% percent and adjusted EBITDA by 46% in the second quarter of 2021 income.
<unk> for the same quarter last year.
This is a unique and a software technology business, because we showed positive EBITDA and adjusted EBITDA.
The immediate results of our investments was our highest revenue quarter in company history, as we generated $81.7 million in revenue in the second quarter.
Not only is this a 27% increase compared to the second quarter of last year.
It is also up.
A very strong eight 2% from the first quarter of 2021. This performance comes as no surprise, our quarterly revenue has been accelerating for the SaaS for the past four quarters. So this strong second quarter is not an outlier.
We always believed that we would grow as customers benefited benefited from our expanded version of our complete technology solution and great customer service.
Already our clients are telling me that they like the solutions, we are offering the directions, we're heading and they're showing it with the dollars. They are spending with us they particularly like the fact that we are the only platform that gives them the ability to interact with us in the cloud.
From our data center from behind their firewall via a custom built hardware or even in a portable device that can fit on a conference room table.
<unk> is yet another key differentiator for us our cash position and liquidity continue to be strong as we ended the second quarter of 2021 with $42.9 million in cash and cash equivalents and no amounts drawn on our $40 million.
All the credit facility.
This is an improvement of 26% compared to the second quarter of last year, when our cash balance was $34.1 million.
As I have been predicting for some time now we knew that the legal industry would eventually recover from the pandemic and as expected. We are capitalizing on the increase in litigation and separately Cross clearly for hard work as a global organization last year has absolutely.
One to pay dividends, we have amazing momentum and it doesn't stop here. In fact this is just the beginning.
We're highly focused on moving current and new customers through our proprietary view platforms, nebulizer, Edr and increasing the subscription base for power controls and ready suites.
<unk> is the crown jewel of our review platform offerings. It is a powerful platform that is intuitive and extremely easy to use.
As I mentioned, a few moments ago. That's also very flexible and offers a variety of delivery models to meet different use cases.
Variety and delivery and Optionality are important sales points for this product as.
As well as the upstream offerings associated with the platform via our <unk> Big data solution for archiving and Nebula legal holds for legal hold solutions with Nebula, we can deliver our solutions from <unk> datacenter in the cloud with Microsoft Azure from behind our clients firewall via rack mounted hardware and <unk>.
Double kit.
Choices important clients want <unk> to be accessible wherever and however, they desire there is no other platform on the market that offers this level of optionality and reach across all possible use cases.
Since 2020, we have significantly increased investment in the negative ecosystem.
Which includes the Nebula review platform.
Big data for archiving and Navy other legal hold for legal hold solutions.
And we are making tremendous strides as we rollout new features.
Such as robust permissions.
Integrated chat viewer and powerful hardware expansion capabilities.
For our enterprise clients, who license nebula behind their firewall clients already loving what we are doing and in the second quarter of 2021, evidenced by Nebula platform revenue growing 77% over the same quarter last year.
July was the best month of data adjusted Nebula history, with a significant contribution from our global offices.
Our R&D investments to not stop with Nebula Edr web the updated version of our stalwart review tool first introduced by core on tract. Many years ago is well underway with core review futures already available now and the bulk of the remaining work to be expected in 2022.
<unk> has a fanatical user base that will really benefit from these upgrades.
Client portals or another focus, giving our clients real time connectivity to meaningful metrics status updates and documentation for their work with us our data recover our data recovery client portal is live now in our Ediscovery client portal will be live in the next few months with all major futures completed in the <unk>.
First half of 2022.
The type of connectivity and visibility offered by our portals would not be possible, but for the seamless nature of our technology and all the connective tissue, we built between that technology in our back office systems.
Ready suite continues to be the utility knife every technology should have in your back pocket with no end in sight.
For its growth or applicability. For example, we recently added functionality that gives users maximum flexibility to format short messaging content, such as text message text messages and chats for review.
There is a lot more to come for one thing is certain we believe the <unk> technology is a game changer and without peer in the industry.
We have an amazing amount of momentum as our entire global team is laser focused on executing our strategic plans.
<unk> to grow and improve our already best in class technology platform and delivering the best client experience possible.
I am proud of the way our team has worked tirelessly through a difficult year to position the company for future success, our people and strong culture makes us special or.
Our excellent second quarter results are just part of a much larger sea change going on at <unk>.
It's super exciting I will now turn the call over to our CFO Don Wilson.
Thank you Chris.
As Chris said earlier, we had a very strong second quarter, which was highlighted by the largest quarterly revenue in company history revenue grew 27% in the second quarter of 2021 compared to the second quarter of 2020.
Sequentially, our second quarter revenue in 2021 was eight 2% higher than the first quarter of 2029, which further demonstrate the strength of our second quarter revenue.
We also significantly improved net loss by 41% and increased EBITDA, 31% and adjusted EBITDA, 46% compared to the second quarter of last year I want to emphasize that we are delivering exceptional revenue growth and strong earnings improvement and this is while we are making significant.
Investments in our technology solutions.
Our technology platform provides an integrated end to end solution that separates <unk> from our competition and is transformational to our customers and the industry.
Customers are enjoying the seamless features and optionality that our nebula platform offers.
Your line experienced its best quarter and grew 77% in the second quarter of 2021 compared to the second quarter of 2020.
Overall, our technology investment.
Successful integration of data recovery and our implementation of permanent operating efficiencies throughout the business are driving strong operational and financial results.
We had our fourth consecutive quarter of revenue improvement as we achieved second quarter 2021 revenue of $81.7 million. This is a significant acceleration in revenue compared to our quarterly revenue of $64.4 million in the second quarter of 2020 EBIT.
EBITDA in the second quarter of 2021 was $13.7 million, an increase of 31% compared to Q2.2020, EBITDA of $10.4 million EBIT.
EBITDA margin for Q2, 2021 was 17%, which is up compared to 16% EBIT margin in Q2.2020.
Q2, 2021, adjusted EBITDA was $17.7 million, an increase of 46% compared to Q2.2020 of $10.4 million and adjusted EBITDA margin grew to 22% compared to 19% in Q2.2020.
Liquidity continues to be strong and our cash and cash equivalents was $42.9 million on June 32021, and we have nothing drawn on our $40 million revolving credit facility.
Our cash balance in Q2, 2020 was $34.1 million. So our current cash balance is 26% higher.
While we are extremely encouraged by the continued progress in our battle with Covid 19, we wanted to see how the country react to increasing infections from the Delta area.
As a result, we remain limited in our ability to accurately predict the financial impact of Covid 19, consistent with what we discussed in our last earnings call. We are continuing to not provide guidance for 2021, having said that we are extremely excited about the strong trend in revenue we've been experiencing the last four quarters clearly Arkansas.
Investments in technology and customer centric focus resulted in one of our best financial results quarters in our history, including our highest revenue quarter of significant year over year and sequential quarterly growth.
We believe <unk> remains well positioned for 2021 and beyond.
We will now open the call to questions.
As a reminder to ask a question. Please press Star then the number one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Your first question is from the line of Greg Gibas with Northland Securities.
Great. Good morning, Chris Thanks for taking my questions.
That's on the record quarter, and a nice growth sequentially and year over year I just wanted to ask if you could.
Talk a little about a little bit about what the key drivers of that growth was.
Is it mostly increase litigation activity and then maybe how youre thinking about the back half of the year.
To that record level of growth.
Do you think that.
Strength is sustainable.
So this is our fourth consecutive quarter of revenue growth or the decline in <unk> 2020.
Data recovery and EBIT February have trended up each quarter.
With the exception of data recovery, which declined a little bit.
Since Q ones and Q1 was a really high data recovery quarter, but.
This growth is due to what Chris is that.
The pandemic has.
Lifted that meant that the court the court systems are open and we're starting to see some of the backlog.
Chris do you want to elaborate further.
Sorry about that Greg I got disconnected right. When you were like in the Middle of your question could you repeat that.
That's not a problem.
Happened.
Yes, it does.
Mostly answered it but it was kind of the key drivers of the growth.
And kind of do you think that level of strength is sustainable heading into the back half of the year.
I mean, the pipeline remains strong.
There is no doubt that the legal community has not come back 100% from.
Covid 19, and a lot of that has to do with the precautions and the safety protocol that they built into the court system itself.
Got that.
So many people now work from home so data collections are.
Challenging right to get people in the office and things like that so we're very pleased with the results to date, but I think that we've got a great strategic plan.
<unk>.
The focus that we have across the company across the globe.
We're really focusing on technology.
Customer facing nebulizer.
Being the lead there.
Ryan portals that we're working on and the automation that we're building in the back office to make.
Working with us.
Usually as possible and I think when you work on that stuff and you do get better.
Clients prospects realize that and you'd have more success. So.
<unk> is poised to keep our head down keep on working got a great plan got great technology, great people and I think good things will happen when you have that formula.
Great.
That's very helpful and I guess relating to kind of the backlog of litigation activity that.
Perhaps still being caught up on.
How long do you expect that maybe it would be a tailwind.
At the end of that.
I mean, if you are.
The expectation for example work like any truck.
It seems to be very high at this point in time I think that you can read articles that are posted online every barry about.
Regulatory bodies and agencies.
Yes.
I would just say.
Putting more scrutiny on deals than in the previous administration, which leads to more volume or we've certainly seen.
<unk> in that type of work so we expect that to continue.
But again, we're blazing new markets with our technology and our offering so.
Are there new markets will provide us.
A lot of boosting tailwind as well so we're not clear to rely on the model of the past we are here to kind of create our own <unk> model.
Which is a phenomenal technology backed by the best client service in the World.
Great.
Sounds good and since we can kind of focus on nebula and the success that youre seeing there was just hoping if we could dive into that a little bit more I guess first you.
You talked about nebula revenue up 77% year over year.
Just wanted to get a sense of what percentage of Ediscovery revenue does zebulun now represent.
Trying to get a better sense of the level of the base that that growth is awesome.
Yeah. So we're not we're not disclosing the amount of revenue.
Revenue at this time, but we're really.
We are excited that our modular platform continues to grow sequentially. We've been talking a lot about nabila, where we're just really extremely happy that we're getting the significant traction at the 77% growth demonstrate nebula is just an amazing powerful platform that intuitive is can be delivered.
Christa.
In the intro deliver from our data center the cloud through Microsoft Azure.
Behind the clients firewall and be a rack mount hardware.
Our portable cat. So there's really there's really no other inflation on the market that offers this level of optionality and reach across all possible use cases that we're really excited about it.
Yes, so I think Greg as a year ago. There was a year ago. On we are we are working right now in compiling metrics that we plan to report to the street at some point in time. So we are working on those and.
We'll let you know when we're finished.
Greg, Yes fair enough.
And you did talk a little bit about this in your prepared remarks, too, but if we can.
What are some of the key differentiating features of the nebula platform. It sounds like there's great optionality.
You also talked about <unk> being a focus of continued investment going forward you know what.
What areas of functions.
Of the platform the kind of two.
<unk> are aimed to improve or develop an automated offerings.
Well in a nebulous is unique.
Because the deployment model for the different use cases is the same so when you look at the platforms being offered today.
There are 100% cloud or seem to be 100% cloud and nebula is.
We've been hosted in the cloud for our clients it can be behind our firewall.
Can be delivered in a rack mounted server behind our customer's firewall and also delivered in the portable units. So that is an absolutely super unique offering that.
Is unparalleled in the industry.
It's something that we designed from the onset and.
That we are going to be very very successful with that now that being said as far as <unk> goes it's a very.
Super intuitive platform backed by powerful technology that <unk> has had four.
10 to 20 years.
In my previous company.
In the late nineties rebuild one of the first E discovery platform. So I've been part of blazing passed in E discovery now for well over 20 years and for.
For example, the processing engine the process. The process is the data that is an application that we've had here at <unk> for a long long time. It is super powerful probably the most powerful processing engine in the industry, we have a proprietary workflow to batch documents.
For contract attorneys that no other platform has.
<unk> had predictive coding and machine learning for years and years and years here. So.
And are there other things, including like early case assessment that are just very very very unique in this platform and really it's the.
Let's see.
The results are.
A whole bunch of experienced people here at <unk> going even back to the.
The curl on track these and the folks that built Edr, which was really a.
The first incredible web hosting platforms a lot of those folks were kind of the green trust behind that are still around and.
Just.
<unk> is really the byproduct of just an incredible amount of.
Ingenuity and innovation.
Lot of very well thought out planning and development timeline.
In the end of the day.
It really is all about.
Customer satisfaction being able to.
And just tons and tons of data process millions of millions of files, making sure that you can run searches across all of those files and have it yield results.
In a matter of a second or two all those things are very important so.
I know that AI or machine learning predictive coding gets a lot of the spotlight on these review tools, but in the end of the day.
The global Rico community really depends upon a platform that can host a tremendous amount of data one complex searches.
Across that database haven't real results very quickly.
So they can get on and does your documents and tag documents and get on with their document production schedule.
Super Super important so.
Mentioned, the robust permissions and multi party support I think in one sentence of my prepared script, but that can be more important our ability to do massive cases like joint defense group work.
Today is limited by our permission settings and multi party support.
But as we.
Work through the rest of this year and early 2022.
We will have that fully in place and I think probably other than one other very very well known platform will be the only referenced in platform at that level of complexity to be able to do that and what does that mean it means that all the work that we have turned away because we didn't have that we'll be able to do now.
Which will provide nebula with incredible.
Incredible growth engine, so I'm Super excited about it obviously I've been in the industry now.
For almost 30 years from the Horse-and-buggy days of Microsoft Microsoft legal copies scanning building profit coating.
Running a company back in the late nineties that developed one of the first and discovery platforms.
And today I would say that the.
The result of what we have with our technology suite, which again is not just nebula with Edr its power controls.
We have thousands of customers in that ready suite.
Which is pretty much used by.
Most law firms and corporations and practitioners when it comes to producing documents.
Absolutely amazing and.
I've been I've been preaching for years and years now how different K L. D is because we're just not a service company. This company is powered by tremendous proprietary technology.
The people that we compete against from a technology enabled service perspective are using third party tools right to relying upon the depth timelines.
Paying the prices that those folks want versus what we what we've done in house and.
This is a.
Youre starting to see some tremendous tremendous benefit with.
The best is yet to come there is no doubt in my mind with this company.
Okay really appreciate the detailed answer Chris.
That's helpful and I guess, just a follow up to a nebula.
Kind of lastly wanted to ask just about.
Relative pricing.
Relative to.
Third party platforms, and then maybe the margin differential that you kind of see.
The financial benefit I guess, if customers do you think they are in house.
Dietary solution.
Well I'll take I'll take it and then I'll, let Tom finish the answer but.
<unk>.
The Bottomline is obviously, we're not paying licensing fees for these tools. So obviously there is.
Inherent.
Savings are dollars that are involved there, which becomes pretty significant when you rack up the amount of users and gigabytes.
We store and data processing.
Data run through predictive coding tools and things like that.
So obviously you have that and then because it's your own application you can.
Obviously be very flexible when it comes to pricing the customers seem to be more competitive.
I think thats Super important, but again I would emphasize the fact that.
In this business with <unk>.
Data growing exponentially and.
Let's say, even just chat platforms that continue to proliferate.
You need to be able to.
Have.
A group of people that can continue to.
Be on your customers' timeline, receiving your customers' feedback and being able to.
Create the spoke solution for folks right, making these community tools for the <unk> community of clients around the world and I think that's as important as any savings. So John you have anything to add to that.
No I Couldnt have said it better I think that was perfect.
All right well great I appreciate the color guys and I'll pass it on.
Thanks, Greg as always.
Thanks.
Okay. At this time there are no further questions I'll turn the call back to Chris Miller for closing remarks.
Yeah.
Thank you very much thanks for everybody's time this morning.
And I just want to thank.
All the global kw families for continuing to.
Such a wonderful job during this very challenging year and a half two years.
I know a lot of folks coming in are they are listening to the replay, but what an amazing group of people can be prouder could be more privileged and honored to be in a position I have and I've got it.
We've got a great team to Jackie teams are second to none and thank you for all your time very excited about the future.
Thank you great quarter and looking forward to the next Glenn Thank you.
Thank you for joining today's conference call you may now disconnect.