Name: KLDiscovery Inc. Q3 2023 Earnings Call
Start: 2023-11-09T13:31:00.000Z

Executive Summary

Q3 2023 revenue was $79.3M (+6% YoY), with gross margin at 50% and Adjusted EBITDA at $15.9M; year-to-date revenue reached a company record $260.0M, with YTD gross margin at 51% .
Nebula performance was a standout: revenue up 100% YoY in Q3 and 57% YTD; adoption metrics rose across matters, active data hosted, and users, including strong cloud momentum .
Liquidity remains adequate with $25.4M cash and an undrawn $40M revolver; however, interest expense was $17.2M in Q3 and the balance sheet shows $289.7M current portion of long-term debt heading into the June 2024 maturity window .
Consensus estimates via S&P Global were unavailable for KLDI, preventing a beat/miss assessment; investors should focus on operational progress and balance sheet risks as near-term stock catalysts [GetEstimates error; see Estimates Context].

What Went Well and What Went Wrong

Nebula revenue rose 100% YoY in Q3 and 57% YTD, with adoption metrics strengthening: matters ~1,338 (+~15% YoY), active data hosted ~500 TB (+~35% YoY), and users ~4,900 (+~20% YoY); cloud data hosted ~200 TB (+~200%), cloud users >2,100 (+~147%), cloud matters ~1,000 (+~144%) .
Gross margin improved to 50% in Q3 (from 45% in Q3 2022) and 51% YTD (from ~47% YTD 2022), reflecting operational efficiency and mix improvements .
Management highlighted record YTD revenue ($260M) and record YTD Adjusted EBITDA ($57M; 22% of revenues), underscoring durable execution: “Our results have been a clear and undeniable message: The investments we made in our technology, infrastructure and solutions are paying off.” .

Net loss remained elevated at $(11.4)M in Q3 despite YoY improvement, and interest expense was high at $17.2M in the quarter, constraining net income trajectory .
Debt structure is a key overhang: current portion of long-term debt was $289.7M at 9/30/23, with risks flagged around the June 2024 maturity/potential acceleration and refinancing needs .
Sequential revenue declined to $79.3M from $90.0M in Q2, and EBITDA/Adjusted EBITDA moderated to $13.9M/$15.9M from $18.5M/$20.1M in Q2, indicating some near-term demand variability (“market continues to be choppy”) .

Metric	Q1 2023	Q2 2023	Q3 2023
Revenue ($USD Millions)	$90.7	$90.0	$79.3
Net Loss ($USD Millions)	$(4.5)	$(4.7)	$(11.4)
EPS (Basic & Diluted, $)	$(0.11)	$(0.11)	$(0.26)
Gross Profit ($USD Millions)	$47.1	$45.0	$39.7
Gross Margin (%)	51.9% (computed from cited revenue/gross profit)	50.0% (computed from cited revenue/gross profit)	50.0%
EBITDA ($USD Millions)	$18.2	$18.5	$13.9
Adjusted EBITDA ($USD Millions)	$20.9	$20.1	$15.9

Metric	Q3 2022	Q3 2023	YoY
Revenue ($USD Millions)	$74.5	$79.3	+6%
EPS (Basic & Diluted, $)	$(0.41)	$(0.26)	Improvement
Gross Margin (%)	45%	50%	+500 bps
EBITDA ($USD Millions)	$5.1	$13.9	+173%
Adjusted EBITDA ($USD Millions)	$11.3	$15.9	+40%

KPI	Value
Net Revenue Retention (%)	104% as of Q3 2023
Clients Served	>6,200
Nebula Matters	~1,338
Nebula Active Data Hosted	~500 TB
Nebula Active Users	~4,900
Cloud Active Data Hosted	~200 TB
Cloud Active Users	>2,100
Cloud Matters	~1,000
Cash & Cash Equivalents	$25.4M (9/30/23)
Revolver Availability	$40M undrawn
Current Portion of Long-Term Debt	$289.7M (9/30/23)

Metric	Period	Previous Guidance	Current Guidance	Change
Overall financial guidance	Q4 2023/FY 2023	N/A	N/A	No formal guidance provided in the press release or call remarks

Topic	Previous Mentions (Q1 2023 & Q2 2023)	Current Period (Q3 2023)	Trend
AI/Technology initiatives	Emphasis on proprietary tech (Nebula) and Client Portal; Nebula processing used broadly; franchise program introduced in Q2	Nebula revenue +100% YoY; AI/ML foundation; “AI renaissance” expected next 12+ months; Client Portal new alerting feature	Strengthening technology narrative and adoption
Product performance (Nebula)	Q2 Nebula revenue $10.9M (+40% YoY), strong processing utilization	Broad adoption across matters/data/users; 100% Nebula revenue increase in Q3	Accelerating growth
Macro/tone	Strong Q1/Q2 results, momentum; acknowledgement of industry tailwinds	“Market continues to be choppy” but momentum remains; bullish tone from CEO/CFO	Mixed macro, confident execution
Regional trends	Global client base and traction noted	“Gaining global traction in each of our regions”	Global breadth improving
Regulatory/legal use cases	Increasing high-value engagements (regulatory investigations, cyber response) noted in Q2	Continued positioning to support legal/regulatory/cyber needs	Sustained focus
R&D/execution/back-office	Highly integrated back office, automation; Client Portal development	Near-total billing automation; new Client Portal alerting, BI features	Execution advantages expanding

CEO on technology-driven momentum: “Our results have been a clear and undeniable message: The investments we made in our technology, infrastructure and solutions are paying off.” .
CEO on Nebula adoption: “Nebula third quarter revenue is up 100% year-over-year… virtually every single legal technology engagement we support benefits from… the Nebula ecosystem.” .
CFO on margin and profitability progress: “Q3 2023 gross margin increased to 50% compared to 45% in Q3 2022… Q3 2023 adjusted EBITDA was $15.9 million compared to Q3 2022 adjusted EBITDA of $11.3 million.” .
CEO on Client Portal: “A corporate client told us, ‘It is critical to have full visibility into our finances. The billing transparency of KLD’s Client Portal is great.’” .

The retrieved transcript content includes prepared remarks from management; Q&A exchanges were not present in the available sections for analysis .

Wall Street consensus estimates via S&P Global for KLDI were unavailable due to missing CIQ mapping, so we cannot assess beats/misses for Q3 2023 revenue or EPS at this time [GetEstimates error].
Investors should monitor subsequent data availability and potential estimate revisions as Nebula momentum and margin improvements are sustained .

Revenue of $79.3M (+6% YoY) and gross margin at 50% signal improved efficiency; sequential softness vs Q2 reflects demand variability in a “choppy” market .
Nebula is the core growth engine with 100% YoY revenue increase and expanding adoption KPIs; Client Portal enhancements deepen competitive differentiation and customer stickiness .
Profitability metrics improved YoY (EBITDA +173%, Adjusted EBITDA +40%), but high interest expense ($17.2M) and sustained net loss highlight the importance of deleveraging .
Balance sheet risk is non-trivial: $289.7M current portion of long-term debt at quarter-end and June 2024 maturity risk could drive refinancing headlines and stock volatility .
Liquidity is adequate (cash $25.4M; undrawn $40M revolver), providing operational flexibility while strategic financing options are pursued .
With consensus data unavailable, trading setups should focus on operational KPIs (Nebula adoption, margin trajectory) and balance sheet catalysts rather than beat/miss narratives [GetEstimates error] .
Near-term: watch for Q4 demand trends and any debt refinancing updates; medium-term: the AI/ML roadmap and Client Portal feature expansion underpin the thesis on margin durability and revenue mix shift .