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KI

KLDiscovery Inc. (KLDI)·Q1 2024 Earnings Summary

Executive Summary

  • Q1 2024 revenue was $80.2M, down 11.6% year-over-year from $90.7M, with net loss widening to $(16.9)M and EPS of $(0.39); EBITDA fell to $7.4M and adjusted EBITDA to $10.6M, reflecting margin compression and higher interest expense .
  • Nebula adoption accelerated: Nebula revenue rose 82% YoY to $14.9M, now 19% of total revenue; active data hosted in Nebula +24% and active users +11% YoY, supporting the structural mix shift toward platform-driven revenues .
  • Balance sheet actions: the company reached an agreement in principle to convert outstanding convertible notes into ~96% of pro forma equity and extend the $291M term loan maturity to August 2027, aiming to materially deleverage and reduce interest burden .
  • No formal quantitative guidance was provided; management’s tone emphasized deleveraging and continued Nebula investment as catalysts for improved profitability post-transaction .

What Went Well and What Went Wrong

What Went Well

  • Nebula momentum: “Nebula continues to shine… Nebula revenue of $14.9 million, up 82% year-over-year… contributed 19% of our total revenue” .
  • Client metrics improved: Legal Technology net revenue retention was 98% (+300 bps YoY), supported by subscription expansion and Nebula cross-sell; legal technology matters reached 8,283 .
  • Strategic balance sheet plan: agreement in principle to convert convertible notes (~96% of equity) and extend term loan to August 2027; management expects “a bolstered financial position and deleveraged balance sheet via a significant reduction in long-term debt and costly interest rate payments” .

What Went Wrong

  • Top-line decline and margin compression: revenue fell 11.6% YoY; gross margin was 48% in Q1 (vs. 50% in Q3 2023), with EBITDA down sharply given higher interest expense ($17.5M) and lower gross profit .
  • Wider net loss: net loss increased to $(16.9)M from $(4.5)M in Q1 2023; EPS deteriorated to $(0.39) vs $(0.11) YoY, driven by higher interest expense and lower operating income .
  • Liquidity reliance: company drew $15M on the revolver by quarter-end, and current portion of long-term debt rose to $565.7M, underscoring near-term balance sheet pressure pre-transaction close .

Financial Results

Consolidated Performance vs Prior Periods

MetricQ3 2023Q4 2023Q1 2024
Revenue ($USD Millions)$79.3 $85.8 $80.2
Net Loss ($USD Millions)$(11.4) $(14.3) $(16.9)
EPS (Basic & Diluted, $)$(0.26) $(0.33) $(0.39)
EBITDA ($USD Millions)$13.9 $12.0 $7.4
Adjusted EBITDA ($USD Millions)$15.9 $17.2 $10.6
Gross Margin (%)50% —48%

YoY comparison (Q1 2024 vs Q1 2023):

  • Revenue: $80.2M vs $90.7M
  • Net Loss: $(16.9)M vs $(4.5)M
  • EPS: $(0.39) vs $(0.11)

Segment and Product Breakdown (Q1 2024)

Segment / KPIAmountNotes
Legal Technology Revenue ($USD Millions)$73.0 Driven by Nebula adoption
Data Recovery Revenue ($USD Millions)$7.2 Ontrack business
Nebula Revenue ($USD Millions)$14.9 Includes $5.7M Nebula Processing Services for non-Nebula-hosted engagements
Nebula % of Total Revenue19% Up from 9% in Q1 2023

KPIs and Operating Metrics (Q1 2024)

KPIQ1 2024Prior Year/Quarter Reference
Legal Technology Matters8,283 8,078 in prior year period
Legal Technology Net Revenue Retention98% +300 bps YoY
Nebula Matters1,320 Adoption broadening across engagements
Active Data Hosted in Nebula+24% YoY Platform scaling
Active Users (Nebula)+11% YoY Engagement rising
Gross Profit ($USD Thousands)$38,104 On $80,172 revenue
Interest Expense ($USD Thousands)$17,508 Elevated debt burden
Cash and Cash Equivalents ($USD Thousands)$18,361 End of period balance
Revolver Draw ($USD Millions)$15.0 As of quarter-end
Current Portion of Long-Term Debt ($USD Thousands)$565,691 Reflects near-term maturities

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY/Q2 onwardNot providedNot providedMaintained: No formal quantitative guidance
Gross MarginFY/Q2 onwardNot providedNot providedMaintained: No formal quantitative guidance
Capital Structure – Convertible NotesNear term (post-close)N/AConvert outstanding convertible notes into ~96% of pro forma equityRaised/Improved: Significant deleveraging contemplated
Capital Structure – Term Loan MaturityTerm loanMaturity June 2024 (pending)Extended to August 2027Raised/Improved: Extended maturity
Interest BurdenPost-transactionHigherExpect reduction in costly interest paymentsImproved (directional, not quantified)

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2: Q3 2023)Previous Mentions (Q-1: Q4 2023)Current Period (Q1 2024)Trend
AI/Technology (Nebula)Nebula revenue +100% YoY in Q3; platform AI/ML and Client Portal emphasis Nebula roadmap with AI enhancements; Q4 Nebula revenue $14.1M; active data/users rising Nebula revenue $14.9M (+82% YoY); 19% of revenue; active data +24%, users +11% Accelerating adoption and mix shift
Capital Structure / DebtHigh indebtedness risk disclosed in forward-looking statements Liquidity update; revolver undrawn at 12/31/23, later drawn Agreement in principle to equitize notes (~96% equity) and extend term loan to Aug 2027 Deleveraging action plan
Client Portal & Customer ExperienceClient Portal highlighted for BI/transparency Portal featured; alerting and visibility advances Portal continues to “deliver exceptional user experiences” per CEO Continued enhancement

Management Commentary

  • “Nebula continues to be a powerful component of the KLD offering… Nebula is a steady component of our revenue base, now comprising 19%… Activedata hosted in Nebula is up 24% and active users are up 11% compared to the same quarter in the prior year.” — Christopher Weiler, CEO .
  • “We entered into an agreement in principle… to significantly reduce our long-term debt and strengthen our financial position… the maturity on our term loan will be extended to August 2027.” — Christopher Weiler, CEO .
  • “Nebula continues to drive Legal Technology revenue growth, delivering revenue of $14.8 million… Nebula revenue growth was 82% over Q1 ’23… Our gross margin was 48%.” — Dawn Wilson, CFO .

Q&A Highlights

  • The retrieved Q1 2024 transcript comprised prepared remarks; Q&A content was not available due to a retrieval limitation. Management emphasized liquidity (cash $18.4M at 3/31/24; $15M revolver drawn) and the expected benefit of the contemplated deleveraging on interest burden and profitability trajectory .

Estimates Context

  • S&P Global/Capital IQ consensus estimates for KLDI Q1 2024 were unavailable due to a mapping limitation in the SPGI CIQ company dataset. As a result, comparisons to consensus could not be made in this report [GetEstimates error].

Key Takeaways for Investors

  • Nebula’s scaling is strategically important: 19% of revenue, +82% YoY, with rising utilization metrics—supporting recurring/platform economics and potential margin leverage as adoption deepens .
  • Near-term headline metrics deteriorated: revenue down 11.6% YoY and EPS to $(0.39), with EBITDA/adjusted EBITDA down sharply—reflecting softer top-line and heavy interest burden; watch the timing and terms of balance sheet transactions for inflection potential .
  • Balance sheet strategy is the key catalyst: converting notes to equity (~96%) and extending the term loan to Aug 2027 could structurally reduce interest expense and de-risk maturities, supporting improved cash generation post-close .
  • Liquidity management remains critical until transactions close: cash $18.4M and $15M revolver draw underscore working capital needs; monitor execution risk and definitive documentation timelines .
  • Mix shift toward technology: continued investment in AI/ML and Client Portal should enhance client experience and retention (NRR 98%), with potential for margin recovery as platform scales .
  • With formal guidance absent, focus on operational KPIs (Nebula revenue, utilization, NRR) and debt restructuring milestones as primary drivers of estimate revisions and stock narrative .
  • Prior quarter performance (Q4) was stronger on revenue/adjusted EBITDA; trajectory will hinge on balance sheet resolution and sustaining Nebula-led growth through 2024 .