Q3 2021 KLDiscovery Inc Earnings Call

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 Wheeler.

Thank you Don and thank you very much for joining Carol Discovery's third quarter 2021 financial results Conference call.

My name is Chris Weiler, and I'm, the CEO and cofounder of <unk> discovery.

You for all joining.

It's been a tremendous year for <unk> discovery and I'm extremely excited about how our company is favorably positioned.

Strong growth for many years to come after.

After the initial setback the world experience at the onset of the pandemic, we have been charging back and building momentum in our business every quarter for the past year.

For the second quarter in a row, we exceeded $81 million in revenue, a 12% increase compared to the third quarter of 2021 thus.

Thus far in 2021, and we've had the highest nine month revenue run rate.

Our company history and have accelerated our annualized revenue run rate to over 325 million.

This is an excellent result, considering that our entire industry has been adversely affected by the pandemic.

Despite continued aggressive investments in our people and our technology, including our particularly fast growing nebula platform.

We still delivered strong EBITDA performance with 20% growth in the third quarter of 2021.

Paired to the same period last year.

Our third quarter 2021, net loss was $29 5 million and includes a $22 5 million charge for an impairment of an intangible asset.

Additionally, our cash position and liquidity to continue to be strong as we ended the third quarter of 2021 with 41 8 million in cash and cash equivalents and nothing drawn on our $40 million revolving credit facility.

From a business perspective, we are really hitting on all cylinders.

Provide our clients with a unique combination of proprietary software and innovative technology based solutions, which are enhanced by our unparalleled customer service. This balanced approach coupled with our global footprint helps us solve complex data challenges for our clients, which includes law firms corporations and consumers around the world.

Over the past 16 years, we have created a battle tested ecosystem.

Software solutions that collects processes and host an immense amount of data globally for our clients every single day.

<unk> is our ecosystem of proprietary technology solutions that enable customers to seamlessly collect.

Process store analyze and govern their data on a single platform.

Reduces if not eliminates the need for third party plug ins or partially integrated applications, resulting in reduced risk improved cost efficiency and a better client experience.

Customers need flexibility and nebula delivers there isn't.

No such thing as a one size fits all when it comes to legal technology while.

While one client may be perfectly happy to operate in the cloud our mother may elect the host or manage data behind their own firewall and yet another client may need a blend of both this is a dynamic we have strategically address.

Since the earliest days with development Nebula is purpose built to be adaptable and allows our clients to interact with us in the cloud.

Premise or even in a portable device.

Can fit in a conference room table in other words nebula can be the technological answer to our clients' data problem wherever and however, they need to solve.

There was no other platform on the market that offers this level of choice with such a seamless experience across all delivering mediums.

Since 2020, we have significantly increased our investment in the Nebula ecosystem. This includes nebulous review platform Nebula Big data for archiving and nebula legal hold for legal hold solutions. Additionally.

Our proprietary artificial intelligence and machine learning architecture is infused a nebula and allows customers to review their data faster and more accurately ultimately saving them time and money.

Overall, we continue to make tremendous strides as we rollout new nebula features such as robust permissions and integrated chat viewer and powerful hardware expansion capabilities for our enterprise clients for license nebula behind their firewall.

Our investments in human capital come inventory Nagel ecosystem are resulting in accelerating the growth in regular sales and overall usage client demand from the everyone continues to be very strong as evidenced by the platforms revenue growing.

66% in the third quarter of 2021 over the same quarter last year.

This was nebulous best quarter of revenue ever of sales increased for the fifth quarter in a row.

As I mentioned on our previous calls we are also investing in client portals portals to give our clients real time connectivity to meaningful metrics.

Status updates and documentation of their work with US all of the work we've done to date to integrate our back office systems has enabled us to create the connectivity and visibility our clients need to analyze their most important data points.

We have already implemented a successful portal for our data global data recovery business and are in the process of launching our portal for our legal technology business right now.

I'm also proud of the fact that we are the largest global provider for data recovery with solutions addressing data recovery Ransomware response email extraction and restoration data destruction for ratio verification and tape management needs.

We serve thousands of global corporate clients in this area and we will continue to look to expand our relationships with them as we offer our information governance and E discovery services.

Clearly our hard work is a global organization continues to pay dividends.

We have amazing momentum in our excellent third quarter results are just the beginning the world in the legal industry continues to recover from the pandemic and as expected we are capitalizing on the increasing litigation and regulatory investigations I.

I would be remiss to not acknowledge the heroic efforts of our entire global team.

Our global family has persevered through some of the most challenging times, our society has ever seen and it is their innovative client first mindset that has been a driving force within the company and allows <unk> to thrive.

Our management team and shareholders or entire employee base a debt of gratitude.

In closing I couldn't be more excited about what we've accomplished.

And what the coming months quarters and years have in store for <unk> and our clients I will now turn the call over to our CFO Don Wilson.

Thank you Chris.

As Chris mentioned earlier it has been a tremendous year for KL discovery revenue in the third quarter at 2021 was $81 1 million up 12% compared with the third quarter of 2020 with over $81 million in revenue in each of the last two quarters, our annualized revenue run rate at three.

<unk> hundred 25 million. This is a significant acceleration in revenue compared to a revenue of $64 4 million in the second quarter of 2020 at the start of the pandemic.

Revenue for the nine months ended September 32021, with $238 2 million up 11% compared to the nine months ended September 32020, Q3, 2021 net loss was $29 5 million and includes a $22 5 million charge for an impairment of an intangible.

Net loss for the nine months ended 2021 also inclusive of the $22 5 million charge for impairment was $53 3 million compared to $39 2 million in prior year.

Here's the background on the impairment in Q3, we negotiated for the termination of use of our license for the curl on track and CRO discovery trade names and executed the final agreement in October 2021, Ms. Significant change was a triggering event, which resulted in an evaluation of impairment on our CRO on track and Karl.

Discovery trade names that were capitalized as part of our 2016 CRO on track acquisition.

One analysis the trade names were deemed to be impaired and we recorded an impairment charge of $22 5 million in Q3 2021, the impairment did not impact EBITDA or adjusted EBITDA.

EBITDA in the third quarter of 2021 was $14 7 million, an increase of 20% compared to Q3 2020 EBIT of.

$12 3 million EBITDA margin grew to 18% in Q3, 2021 compared to 17% in Q3 2020.

Q3, 2021, adjusted EBITDA was $16 8 million up slightly from $16 7 million compared to Q3 2020.

EBITDA for the nine months ended September 32021 was $43 4 million, an increase of 23% compared to the nine months ended September 32020, EBITDA margin grew to 18% for the nine months ended September 30, 21 compared to 16% for the nine months ended September 32.

<unk> thousand 20 <unk>.

Adjusted EBITDA for the nine months ended September 32021 was $49 9 million an increase of 14.

14% compared to the nine months ended September 32020, adjusted EBITDA margin grew to 21% compared to 20% for the nine months ended September 32020.

It's important to reiterate that we are delivering exceptional revenue growth and strong earnings improvement. While we work we are making significant investments in technology solutions, including the nebula ecosystem.

Mers are enjoying the seamless features.

Analogy that are nebula platform offers.

Experienced its best quarter and grew 66% in the third quarter of 2021 compared to the third quarter of 2020.

Liquidity continues to be strong as our cash and cash equivalents was $41 8 million on September 32021, and we have nothing drawn on our $40 million revolving credit facility cash.

Cash collections in Q3 increased to $83 4 million compared to $79 7 million in Q3 of 2020 also domestic collections in Q3 were the highest in company history.

Yeah.

We will consider providing guidance in 2022, we remain extremely excited about the strong trend in revenue over the past year and particularly the last two quarters during each of which we generated $81 million in revenue clearly our continued investments in technology and customer centric close. This resulted in one of the best quarter.

It was in our history in terms of our financial results and we are well positioned for the rest of 2021 and beyond we will now open the call to questions.

At this time I would like to remind everyone in order just to ask a question press star followed by the number one on your telephone keypad.

Pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Craig gave us with Northland Securities. Your line is open.

Great. Thanks.

Good morning, Chris and Don Thanks for taking the questions.

Congrats on the strong nebula growth. Once again just wanted to ask are those existing customers that may be decided to switch over to nebula or.

Imagine if the split of that and new customers is there any color you can provide there.

You know considering the growth that youre seeing with nebula when it makes sense to eventually break that out.

Just kind of that growth that you're seeing with nebula.

Great question and good morning, Greg.

Yeah, and actually in our 10-Q, we are going to you'll see that we're going to break out nebula, we haven't disaggregated revenue schedule that we include in the footnotes and we will be breaking out and not be a lot and it will be breaking out two components Nebula and then our other technology solutions.

So.

We're really excited about the 66%.

Growth quarter over quarter.

You know the revenue is a combination of existing customers and new customers.

And we will I hope to continue to see sequential increase in revenue generated on the platform.

Okay great.

And I guess, just understanding the dynamics sequentially.

The slight revenue decline and I think margin was down a little bit as well sequentially on an adjusted EBITDA basis.

Was that kind of related to the resurgence in COVID-19 kind of the Delta. There is there are are there any other factors that we should consider.

No I don't think so.

We're happy that our revenue was 81 over 81 million and in both quarters.

Our adjusted EBITDA was slightly lower than that you know that just really are some variability in the pricing and more favorable pricing for our customers, resulting in some of our some of our Doc review work.

But you know we continue to enjoy significant increases in document you do.

Really I think the volume due to our ability to handle the complex legal cases like second request and joint defense cases, and the fact that we're a provider of global scale and we have that that you know the proprietary technology and the white glove service to really address these most complex cross border legal reviews, so where we're really.

Excited about you know the two quarter the revenue over 81 million and that.

That annualized.

Revenue of of run rate of $325 million.

Okay, Great and Don you alluded to this in your prepared remarks, but I'm just kind of given the visibility on your end markets improving it does it makes sense to reinstate guidance next year and if so when might we see that.

Yeah, well, we're certainly going to consider.

In 2022.

For the 2020 over a year.

Okay, Great and you don't wanted to get your updated thoughts on cleaning up the outstanding warrants.

You know I think you guys had talked about that in the past, but I'm just kind of wanted to understand where that stands as a priority.

Yeah. So I mean, you know we view our current capital structure as a bridge and we are continuing to assess our capital structure and we'll make sure and keep our stakeholders informed of any future decisions that we make when appropriate.

Okay, Great and I guess last one with me.

Can you remind us of the seasonal dynamics that you typically see in <unk>.

Neither the Ediscovery your data recovery businesses in Q4 and.

Just going back to what you previously were talking about about some pricing related.

I think lower pricing in the Doc review.

Is that kind of going to be sustainable or I guess continued into Q4 or was that more one time in Q3.

I mean, I think we're going to continue to see increases in their dot review work for the reasons that I said before I mean, you know pricing is somewhat variable.

But you know.

I think we're going to continue to see and we have good margins and Doc review and I think we'll continue to see that going forward.

Okay.

Yes seasonal.

Yeah seasonality I mean, typically I don't know that there is and I'll, let Chris address this as well I don't know that there's a ton of seasonality in our business I mean typically Q.

Q4 for whatever reason, we do I'm, not saying that that's necessarily what's going to happen less Q4, but we do typically see higher revenues in Q4.

And a higher cash collections in Q4 as well.

But I'll, let Chris weigh in on the seasonality aspect, but I don't think there's a ton of seasonality in our business.

Yeah December can be a mixed bag. So you know we ended the quarter strong and things look pretty good and I think.

If there's any seasonality in the business, there's a little bit in August when people are on vacation or December over the holidays.

Okay great.

Appreciate it.

There are no further questions at this time I will now turn the call back over to Mr. Chris Wheeler Chief Executive Officer.

Thank you so much and thank you Don and thank you for each of them, but the only for all the hard work that you do.

Behind the scenes and thank you for joining the call. This morning have a great weekend.

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

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