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KLDiscovery Inc. (KLDI)·Q2 2023 Earnings Summary

Executive Summary

  • Revenue of $90.0M, GAAP EPS of $(0.11), and Adjusted EBITDA of $20.1M; gross margin ~50.0% and operating income $11.4M signal continued profitability improvements under cost discipline and Nebula adoption .
  • Sequential revenue was effectively flat vs Q1 ($90.0M vs $90.7M), while Nebula revenue accelerated to $10.9M (+40% y/y), a key growth lever cited by management .
  • No formal FY23 guidance; management reiterated a policy of not providing guidance amid macro uncertainty (maintained from Q4 and Q1) .
  • Liquidity: cash of $20.9M and undrawn $40M revolver; however, the balance sheet shows a large current portion of long-term debt ($289.5M) with management repeatedly flagging substantial indebtedness and June 2024 maturity risk as a key focus area for investors .

What Went Well and What Went Wrong

What Went Well

  • Revenue stability at record levels and profitability progress: “second highest revenue quarter ever with $90.0 million… We improved net loss by 58% year-over-year, EBITDA increased 91%, and Adjusted EBITDA was up 63%” .
  • Nebula traction accelerating: “Nebula generated $10.9 million of revenue in the second quarter of 2023, up 40% compared to the second quarter of 2022” with broader adoption “for virtually every legal technology engagement worldwide” .
  • Operating discipline and liquidity: adjusted EBITDA >$20M for a third straight quarter; CFO: “cash and cash equivalents were $21 million… nothing drawn on our $40 million revolving credit facility” .

What Went Wrong

  • Leverage and near-term maturities: current portion of long-term debt jumped to $289.5M at 6/30/23; management explicitly highlights “pending maturity and potential acceleration… in June 2024” risk .
  • Interest expense remains heavy: $16.2M in Q2, a significant drag on GAAP earnings despite stronger operations .
  • No guidance provided: investors lack formal targets on revenue or margins; company maintained its stance of not providing FY2023 guidance given macro uncertainty .

Financial Results

MetricQ4 2022Q1 2023Q2 2023
Revenue ($USD Millions)$85.8 $90.7 $90.0
GAAP EPS ($USD)$(0.12) $(0.11) $(0.11)
Gross Profit ($USD Millions)$44.1 $47.1 $45.0
Gross Margin %51.4% 51.9% 50.0%
Operating Income / EBIT ($USD Millions)$10.4 $11.4 $11.4
EBIT Margin %12.1% 12.5% 12.6%
EBITDA ($USD Millions)$18.3 $18.2 $18.5
EBITDA Margin %21.4% 20.0% 20.5%
Adjusted EBITDA ($USD Millions)$20.4 $20.9 $20.1
Net Loss ($USD Millions)$(5.0) $(4.5) $(4.7)

Non-GAAP reconciliation highlights (Q2 2023):

  • EBITDA derived from net loss $(4.680) + interest $16.192 + taxes $0.182 + D&A $6.766 = $18.460; Adjusted EBITDA adds acquisition/financing $0.353, stock comp $0.877, restructuring $0.556, systems $0.158, less change in warrants $(0.317) → $20.087 .

Product KPI (selected):

KPIQ1 2023Q2 2023
Nebula Revenue ($USD Millions)$8.2 $10.9
Nebula YoY Growth %+34% +40%

Liquidity and capital structure:

MetricQ4 2022Q1 2023Q2 2023
Cash and Cash Equivalents ($USD Millions)$32.6 $26.3 $20.9
Revolver Drawn ($USD Millions)$0 $0 $0
Current Portion of Long-Term Debt ($USD Millions)$3.0 $3.0 $289.5
Long-Term Debt, Net ($USD Millions)$524.5 $527.4 $243.9

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY 2023Not provided Not provided (policy maintained) Maintained
Adjusted EBITDAFY 2023Not provided Not provided (policy maintained) Maintained
EPSFY 2023Not provided Not provided (policy maintained) Maintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2022, Q1 2023)Current Period (Q2 2023)Trend
Nebula platform and AI automation“Highest revenue quarter for Nebula, +23% y/y; expanding library, strong adoption” “Nebula revenue $10.9M, +40% y/y; used for virtually every engagement; adding cutting-edge AI” Strengthening adoption and monetization
Client PortalLaunch in 2022; expanding features and global rollout (EMEA) “Continuously evolving; real-time visibility with 30+ metrics; customizable alerts coming months” Feature velocity and client value rising
Franchise ProgramAnnounced; early-stage offering to entrepreneurs Registration progressing; ramping marketing in Q3; expected EBITDA growth lever Early buildout, potential revenue lever
Macro/regulatory/cyberStrong pipeline in regulatory and cyber incident response Continued high-value engagements (regulatory investigations, cyber response) Sustained demand tailwinds
Liquidity/debtLiquidity “strong”; no revolver usage Liquidity “strong”; undrawn revolver; but elevated current debt and highlighted maturity risk Balanced: liquidity intact, debt risk nearer-term
Data volumesQ4 saw record inbound data growth (+45% y/y in Q4) Favorable industry tailwinds from expanding data volumes Structural tailwind persists

Management Commentary

  • CEO: “We generated our second highest revenue quarter ever with $90.0 million… We also accelerated Nebula revenue growth… to 40%… This blends world class 24/7/365 customer service with bespoke, purpose-built technology” .
  • CEO: “Client adoption [of Nebula] is growing at a tremendous rate… will continue to grow as we pave the way for additional cutting-edge AI” .
  • CFO: “Q2 2023 net loss of $4.7 million was a 58% improvement… EBITDA $18.5 million… third consecutive quarter of adjusted EBITDA over $20 million” .
  • CFO: “Liquidity remains strong… cash… $21 million… nothing drawn on our $40 million revolving credit facility” .

Q&A Highlights

  • The provided transcript content contains prepared remarks only; Q&A content was not available in the retrieved materials, and no incremental guidance or clarifications were captured beyond management’s prepared commentary .

Estimates Context

  • Wall Street consensus via S&P Global was unavailable due to a missing CIQ mapping for KLDI in the S&P Global Capital IQ dataset, so we cannot provide comparisons vs estimates or identify beats/misses for Q2 2023. If needed, we can re-run once mapping is added (error encountered when retrieving “Primary EPS Consensus Mean” and “Revenue Consensus Mean” for Q2 2023).

Key Takeaways for Investors

  • Operational momentum is intact: revenue stable near record highs, with gross margin ~50% and EBITDA margin ~20% showing resilient profitability despite higher interest expense .
  • Nebula is a clear growth engine: strong y/y growth (+40%) and broad usage in engagements suggest continued mix shift toward proprietary tech solutions .
  • Liquidity adequate but balance sheet risk rising: cash declined to $20.9M and the current debt portion rose sharply to $289.5M; refinancing/extension progress is likely a key stock catalyst .
  • No FY23 guidance: absence of formal targets keeps estimate dispersion high; investors should focus on quarterly execution (revenue stability, Nebula growth, adjusted EBITDA >$20M) .
  • Watch operating leverage: continued cost efficiencies and product-led growth can offset interest burden; sustained adjusted EBITDA and cash generation are critical .
  • Thematic tailwinds: expanding data volumes and regulatory scrutiny underpin demand for eDiscovery and incident response; supports medium-term thesis .
  • Near-term trading implication: updates on debt refinancing, Nebula customer wins, and any guidance reinstatement are likely to drive upside/downside given current fundamentals and leverage profile .

Sources: KLDiscovery Q2 2023 Form 8-K and Exhibit 99.1 earnings release ; Q2 2023 earnings call transcript ; Q1 2023 Form 8-K and Exhibit 99.1 ; Q1 2023 earnings call transcript ; Q4 2022 Form 8-K and Exhibit 99.1 ; Q4 2022 earnings call transcript .