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spk00: Good morning. My name is Brianna, and I will be your conference operator today. I'd like to welcome everyone to the KL Discovery Q4 2023 Financial Results Conference Call. At this time, all lines have been placed on mute to prevent any background noise. As a reminder, this call is being recorded. I will now turn the conference over to Dawn Wilson, Chief Financial Officer. You may begin.
spk01: Thank you, operator. Welcome to KLDiscovery's Q4 and full-year 2023 conference call. Today's call contains forward-looking statements within the meaning of the federal securities laws. 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. KL Discovery undertakes no obligation to amend, update, or clarify these forward-looking statements made as of today unless required by law. During this call, we will also present non-GAAP financial measures such as EBITDA and adjusted EBITDA, which were not prepared in accordance with GAAP. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures are shown in detail in our press release issued last night. along with definitions for those terms and a discussion of certain limitations. Management believes that our presentation of non-GAAP financial measures provides useful supplemental information to investors regarding our results of operations. Our non-GAAP financial measures should only be considered in addition to and not in isolation from or 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 Weiler.
spk02: Thank you, Dawn, and thank you for joining us today for KL Discovery's fourth quarter and full year 2023 financial results conference call. My name is Chris Weiler, and I am the CEO and co-founder of KL Discovery. I'd like to begin by saying I am so thankful to be working with the amazing KLD team of professionals from around the globe. They have made all the success we have seen today possible with their dedication and commitment to excellence. Our team provides unmatched, world-class 24-7, 365 customer service, coupled with our innovative technology platform delivered through tools such as Nebula, our client portal, and our growing suite of AI tools. This powerful combination of people and technology creates an unbeatable value proposition it is making a difference to our existing clients as well as attracting new clients around the world. While our performance speaks for itself, it bears highlighting that 2023 was a landmark year for KL Discovery. We made tremendous progress executing on our many strategic initiatives, which translated into record financial results. The strategic decisions that we have made and implemented over the past several years have resulted in increased customer satisfaction and usage as well as excellent financial results with increased revenue and margins. KLD technology is not only driving more client usability, it is also benefiting margins by providing a platform that reduces the level of people support needed for mundane tasks, bringing up time for our client service team to focus on servicing the strategic needs of our clients. A great example of this is our flagship eDiscovery platform Nebula. Nebula brings full EDRM coverage to customers that demand high performance solutions at every phase of discovery. Nebula continues to capture new customers and is rapidly becoming the preferred solution for many of our existing customers. In addition to experiencing a significant growth and adoption amongst our client base, Nebula is also driving financial results and is becoming a significant part of our revenue and profitability. Our record-breaking revenue in 2023 was bolstered by strong contribution from Nebula, which generated $46.1 million, which includes $14.2 million for Nebula processing services for non-Nebula-hosted engagements. 2023 Nebula revenue is up $17.6 million, or 62% compared to 2022. Momentum for Nebula is strong. Nebula revenue for Q4 was $14.1 million, up 74% over Q4 2022. Overall, Nebula is now 13% of KL Discovery's total revenue. The momentum KLD has created within the marketplace is irrefutable. In 2023, we saw an increase in large matters as 52% of legal technology revenue came from matters that generated revenues of $500,000 or more. This is an increase from the 47% in 2022. Our net revenue retention rate for legal technology was 104%. We delivered outstanding results for the full year of 2023, setting all-time company records with our highest revenue of $345.8 million, lowest net loss of $34.8 million, our highest EBITDA of $62.6 million, and highest adjusted EBITDA of $74 million. Overall, the fourth quarter of 2023 was one of our best quarters ever as we delivered solid revenue of $85.8 million, which is an increase of 8% sequentially compared to the third quarter of 2023. Our strong revenue growth is positively impacting the bottom line. These results are no accident. Our performance in 2023 is a result of what we believe is a winning strategy being well executed by our global team of professionals. As a result of our investment in technology, backend infrastructure, optimization of headcount and real estate footprint, we created a scalable infrastructure with margins that increased as revenue increased. Both our full year gross margin and adjusted EBITDA margin expanded in 2023. We've known this for years, but the market is finally catching on. Nebula is a premier e-discovery platform that definitely balances ease of use and powerful functionality to create an unmatched user experience. Comparing 2023 to 2022, the number of Nebula matters has grown 17%, while active data posted is up 32%, active users are up 13%. While those growth numbers illustrate Nebula's traction, they are dwarfed by Nebula's impressive financial results. As I mentioned a few minutes ago, Nebula continues to be a massive growth driver for the company with year-over-year revenues of 62%. As proud as we are of Nebula's growth thus far, the best is still yet to come. We continue to invest heavily in Nebula and artificial intelligence that empowers the user experience like never before. Nebula's existing AI machine learning toolkit will soon be greatly enhanced by updated models and improved workflows. New AI features are slated for release in 2024 and 2025 to further solidify Nebula as an e-discovery powerhouse. Many of these product initiatives are the results of years of dedicated AI research that we've been prioritizing since 2019, years before the latest wave of Gen AI hype. Additional 2024 Nebula roadmap highlights include entirely new authentication system, with support for new single sign-on protocols and additional multi-factor authentication options, promotions of data from Nebula processing and ECA to third-party platforms for greater optionality across our network of vendors and partners, data source connectors and improved handling of chat and business communications data such as Teams, Slack, and Gchat, re-architected ingestion pipeline to dramatically reduce the time from upload to review, and many quality of life improvements on the review and production side of the EDRM in addition to the aforementioned AI enhancements. As we look ahead, Nebula's reach is only going to continue to expand with it being a state-of-the-art platform that will be the interface for KL Discovery's many gen AI initiatives. By the way of background, we have dedicated AI and data science team since 2019 with over 17,000 hours of R&D invested into KLD's current and future AI offerings. Recent innovations in foundational AI has spurred massive opportunity for technology providers and software platforms like Nebula. We are well positioned to capitalize on these state-of-the-art advancements and productize them in ways that drive real results for customers. While others may rush to incorporate large language models in any way possible, our focus is always on practical solutions that deliver quantifiable value. This approach is reflected by not only our key AI MNL initiatives, but also our larger Nebula development roadmap of which AI ML initiatives are a critical part. While we are very excited what recent and future AI innovations may bring to the industry, the general consensus is that the adoption of Gen AI solutions will be conservative. Considerations around cost, scalability, legal ramifications, privacy, and ethical implications must all be carefully weighed by law firms and counsel alike. Regardless what timeline plays out, Nebula and KL Discovery are poised to be market leaders in software and services respectfully. Moving on, I would be remiss if I didn't talk about KL Discovery's client portal. I've always seen this tool as a catalyst to evolve the customer experience and I am bullish as ever about the impact this is having on our clients. With real-time visibility and complete transparency into their portfolio of matters, we believe our clients have an unmatched level of business intelligence with KL Discovery. In Q4 of 2023, we released our one-of-a-kind alerting feature that proactively informs users of critical data points around budget attainment, work in progress, and sudden changes of matter activity. We've recently enhanced this functionality to include a series of default alerts automatically installed for every client portal user to help take the guesswork and surprises out of eDiscovery. Another inflection point for KL Discovery occurred in Q4 of 2023 when we acquired Senza, an established global ALSP from India serving clients in the US and UK with scalability, cost-effective, and reliable managed legal services built on best-in-class technology, offering deep operational expertise, rigorous quality control, and robust client service. This acquisition immediately gives us a mature India operation to expand our best-in-class solutions, including our secure managed document review and cyber incident response offerings. This combination also allows us to expand contract management solutions by blending consulting, advisory, project management, hosting, and legal AI with lawyers in the loop. We believe this toehold in India affords us countless opportunities to drive business results while also enhancing top and bottom line financial performance. Lastly, I'd like to provide an update on our one of a kind eDiscovery franchising program. We are proud to announce that we are now approved in all 50 states to offer eDiscovery franchise opportunities. As a reminder, KL Discovery's franchise program leverages the company's proven e-discovery business model, global footprint, around-the-clock client support, and full technology stack to create a point of entry for legal technology entrepreneurs and adjacent businesses across the country to establish an e-discovery business. With this program now available nationwide, we are seeing tremendous interest in our quickly booking appointments for our upcoming multi-city franchise roadshow that we plan to conduct later this year. I continue to be amazed at how KLD continues to operate at an extremely high level despite challenging market conditions. While our results are remarkable and a true testament to our team and their dedication to excellence, their real excitement lies in looking ahead. We have proven our ability to execute in our strategy positions as for continued success. Our technology is already best in class and we believe it's only going to get better. Our franchise program is no longer geographically constrained in the US and provides tremendous potential for net new revenue opportunities. We are now operating in India, creating a wealth of possibilities not previously available to us. I am more optimistic now than ever before about our direction and the possibilities before us. With our great team, loyal customers, purpose-built technology, and a sound strategic vision, the wind is truly at our backs as we head into 2024 and beyond. I will now turn the call over to our CFO, Dawn Wilson.
spk01: Thank you, Chris. We achieved excellent financial results in the fourth quarter and full year of 2023. For the full year of 2023, we had our highest revenue, lowest net loss, highest EBITDA, and adjusted EBITDA, while improving gross margins and adjusted EBITDA margins compared to 2022. Revenue in the fourth quarter of 2023 was 85.8 million, which is on par with 85.8 million in the fourth quarter of 2022. For the full year 2023, revenue was 345.8 million compared to 317.4 million in 2022, a 9% increase. Legal technology revenue for the full year increased to 312.5 million, from 282.8 million in 2022, an 11% increase year over year. Our growth in legal technology revenue is due to increased Nebula growth, increased number of customers, increased number of matters, and increased revenue from complex matters. Our comprehensive product offering, technology-enabled service offerings, and reputation as a trusted partner to our clients enable us to capture matters of large size and complexity. During the years ended December 31, 2023 and 2022, 52% and 47%, respectively, of legal technology revenue was produced by matters that generated revenue greater than $500,000. And 79% and 77%, respectively, of our legal technology revenues were generated by matters greater than $100,000. Additionally, we saw an increase in our legal technology net revenue retention rate to 104% for 2023 versus 94% for 2022, indicating continued growth from our existing long-tenured customer base. Nebula continues to drive legal technology revenue growth, delivering revenue of $46.1 million. That's inclusive of $14.2 million for Nebula processing services for non-Nebula hosted engagements for 2023. with year-over-year revenues up 62% and Q4 23 revenues up 72% as compared to Q4 2022. Nebula revenues are currently 13% of our total revenues. We have a strong track record of growing our client base and we believe our ability to increase the number of clients utilizing Nebula is an important indicator of our market penetration, our business growth, and our future opportunities. The number of Nebula clients increased to 1,673 versus 1,593 as of December 31, 2023, and 2022, respectively. Additionally, as Chris discussed, we have seen tremendous growth in key Nebula utilization metrics, including number of users, number of matters, and active data hosted as Nebula continues to gain traction. Our strategy to focus on managing costs while still investing in our technology continues to deliver positive results. Net loss improved 19% for the full year of 23 compared to 22, as net loss was reduced from 43.2 million to 34.8 million. In the fourth quarter of 2023, net loss was 14.3 million compared to 5 million in Q4 2022. EBITDA and adjusted EBITDA results also saw significant gains for the full year of 2023. up 41% and 27% respectively compared to 2022. Q4 2023 EBITDA was 12 million compared to Q4 2022 EBITDA of 18.3 million. Q4 23 adjusted EBITDA was 17.2 million compared to Q4 22 adjusted EBITDA of 20.4 million. Additionally, our gross margin improved significantly. This improvement in margin comes from years of investment in technology and improvements in back-end infrastructure, optimization of headcount, and real estate. Our liquidity includes our cash and cash equivalents, which were $15.4 million on December 31, 2023, and we had nothing drawn on our $40 million revolving credit facility as of December 31, 2023. As of today, we are $15 million drawn on the revolving credit facility. In closing, we are very happy with our strong financial results for the fourth quarter in the full year of 2023, as our team at KLD continues to perform and does a great job every day. As always, we will continue to be diligent, agile, and build upon our strong foundation and momentum. I will now turn the call over to Chris for final comments.
spk02: Thank you, Dawn. I just wanted to thank everyone for their time this morning, and again, Thank the KLD Global family for all that you do every day. You're amazing, and I'm really proud of the efforts that you did and the accomplishments of 2023.
spk00: This will conclude today's conference call. Thank you for joining us.
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