CS Disco, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the CSDISCO first quarter of fiscal year 2022 conference call. At this time, all participants are in a listen-only mode and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again. I would now like to hand the conference over to your first speaker today, Lee Robinson, CS Disco Investor Relations. Please go ahead. Good afternoon, and thank you for joining us on today's conference call to discuss the financial results for Disco's first quarter of 2022. With me on today's call are Kiwi Camera, Disco's co-founder and chief executive officer, and Michael LaFerre, Disco's chief financial officer. During today's call, we will review our financial results for the first quarter of fiscal year 2022 and discuss our guidance for the second quarter and an update on full fiscal year 2022. Today's call will include forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including the not limited to statements regarding our financial outlook, including our guidance for the second quarter and full fiscal year 2022, our market opportunity, market position, product strategy, and growth opportunities. In addition to our prepared remarks, our earnings press release, SEC filings, and a replay of today's call can be found on our investor relations website at ir.csdisco.com. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent our management's beliefs and assumptions only as of the date made. Information on factors that could affect the company's financial results is included in its filings with the SEC from time to time, including the section titled Risk Factors and the company's annual report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022, as amended on April 29, 2022. and the company's upcoming Form 10-Q for the quarter ended March 31, 2022. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalent is available in our earnings release. And with that, I'd like to turn the call over to Kiwi.

Thank you for joining our Q1 2022 earnings call. I'm tremendously proud of what we've built and how we've continued to innovate to create a comprehensive legal technology platform that transforms the way the legal industry works. I continue to be excited about the future of DISCO and our goal to be the technology that powers legal. In the simplest of terms, our ethos at Disco is to build and offer technology that frees lawyers to actually practice law, and most importantly, achieve better legal outcomes in a more efficient, tech-enabled way. I will begin with a brief overview of our Q1 2022 financial results. We are pleased to have achieved another quarter of strong growth across the business. revenue grew to 34.5 million up 63 percent year over year notably we had a record month in march for e-discovery usage growth our international revenue nearly doubled year on year attributable in part to the continued expansion of our uk team these results reflect our ability to continue to increase adoption and penetration with existing clients continue to win new clients, and expand multi-product usage across our platform. We are thrilled with the continued growth and adoption of our software-powered solutions by lawyers who see the value in shifting to a technology-first approach. I will highlight a few key achievements from the quarter, capturing more of the corporate legal value chain, introducing meaningful product enhancements, continued successful scale-out of and execution by our go-to-market organization, and a few illustrative customer success stories. In Q1 2022, we expanded our platform to capture a larger portion of the legal value chain and continue our mission to build a complete solution for legal departments' needs. Historically, we have done this organically by growing our existing products and building new products in-house, like Early Case Assessment and Case Builder. In Q1, we completed our first acquisition, acquiring legal hold and data request technologies from Congruity 360 that address some of the most pressing needs of corporate legal departments. Our acquired Disco Hold product automates the manual work that is necessary to comply with corporate preservation requirements, which has become critical with increasing volumes of enterprise data that corporations must capture and save for regulatory requirements or legal demands. In particular, Disco Hold excels at connecting to and holding in place data in modern cloud systems of record, such as Office 365. The Disco Request product dramatically simplifies the process of tracking and responding to subpoenas and other data access requests. With this acquisition, we move closer to the start of the corporate legal value chain, access a new segment of the market, and gain a new entry point with customers. We're excited to add these products to our platform and the team that came to Disco with them. We are at the early stages of introducing Disco Hold and Disco Request to our existing clients and presenting Disco's full spectrum of products to the clients that already use Hold and Request. In March, following the close of the acquisition, we ported over all of the existing Hold and Request clients to Disco and completed more than a demo per day of the Hold product. As we fully integrate the DISCO hold and DISCO request products in our go-to-market motion over the coming months, we look forward to expanding our multi-product strategy and helping our clients streamline their legal processes from start to finish. This broadening of our platform offering is consistent with our strategic vision, which we discussed on our fiscal year 2021 annual earnings call. Our focus on improving clients' daily user experience drives innovation and customer satisfaction. We continuously roll out product enhancements to make the daily lives of lawyers easier and their legal processes more efficient. We were pleased to hear from customers that Disco's AI is a key competitive advantage and one of the primary reasons they choose to use Disco. In Q1, we introduced time tracking and review which allows customers to measure and report on reviewer productivity, including documents per hour, time spent in-app, or time spent for document. This feature and the corresponding metrics enable customers and managers to assess performance of document reviewers and view how much time is spent on any given review. In addition, tracking time in the app allows customers to reconcile billing entries for review activity with actual time spent using Disco. This was a highly requested feature from customers, and we are thrilled to be able to offer it to them. We also released enhancements to our native Excel redaction capabilities and to the reusable filter component that is part of our application architecture and is shared between Disco products like eDiscovery and Case Builder. We are also pleased to announce new evidence management functionality in Disco Case Builder. Today, the platform's annotations page provides case teams with a holistic view of all annotated testimony from across all of their depositions and witnesses on a single screen, from which litigators can search, review, edit, and export the best evidence for use in depositions, motions practice, or trial, all in seconds. Now, in addition to using the annotations page to identify and make strategic use of key excerpts of deposition testimony far faster than they otherwise could, legal teams are also empowered to compare the corresponding video evidence across witnesses on the same screen. Equipping litigators with a side-by-side analysis of deposition video clips not only allows them to more readily compare witnesses' presentation and potential case impact, but also to more confidently select and prepare the best evidence for use in the development of a winning case strategy, that is, to build a stronger case faster. We take performance of our platform seriously. and continually invest in performance improvements across multiple aspects of our core products and platforms. We have continued to optimize our data processing pipeline, critical for efficiency and user experience, with the rising volumes and types of data that corporations have to deal with, and we made measurable improvements to document ingest and loading speeds. In addition to our investments in our products, we are pleased with the progress and productivity of our expanding go-to-market team. As we've talked about in the past, we have ambitious plans to expand our go-to-market organization, and we are making good progress toward that goal. In the last year, we have doubled our ranks of quota-carrying reps and will continue to build that team. In addition to growing scale, we are seeing growing productivity across many teams. Our sales development representative team, many of whom are recent hires and who initiate lead generation and introduce prospects to Disco, were more effective on a per head basis and in the aggregate than in any other quarter. And our customer success team, who often are the first to identify upsell or cross-sell opportunities, had a record win quarter with impressive product cross-sell and expansion of Disco usage within existing clients. We're excited to see the investment in our people generate solid business results. As demonstrated by our results in Q1, we continue to see great momentum across our client base and products. As we've done in prior earnings calls, we enjoy sharing customer anecdotes that demonstrate how the Disco platform is used by clients, how quickly adoption can ramp and be expanded across our clients' legal organizations, and the benefits that our clients see in using Disco. One of our Q1 success stories is a new corporate client that was introduced to Disco through a partner at their external counsel, an AMLA 100 firm. This corporate client became a six-figure, multi-product client within their first quarter using Disco. This is a great example of the trends we've seen and discussed previously, where we're landing larger clients, clients are ramping usage more quickly, and using more than one Disco product. The client's choice to try Disco and continue to increase usage on the Disco platform was initially driven by our ability to offer flexible product usage options and the simplicity of our pricing model, which allowed them to make an informed and financially transparent decision for their e-discovery and review needs. Another new corporate client in C1 began when our sales team met with their Deputy General Counsel. They had a large case where they had not yet picked an e-discovery provider. The corporation was working with a litigation boutique as outside counsel, and there was a lot of data, around 350,000 documents to parse through for the case. To win the mandate, our team demonstrated DISCO's ability to be a total solution to both outside counsel and the corporation's general counsel to manage data collection, e-discovery, and preparation for the case. They appreciated our ability to offer a predictable flat fee guaranteed pricing on review, despite the slight premium on our e-discovery software. Since the start, they've expressed their appreciation for the experience they've received from the DISCO team, including daily updates on hot documents found in the review process, our team's follow-ups to discuss trends in the documents, and their ability to see these trends themselves using DISCO's AI and the eDiscovery user experience, and ultimately the completion of the initial review under their time deadlines. We look forward to continuing to work with this client through the completion of the matter and hopefully secure a new long-term relationship. Additionally, we had a large Amlaw client who has been with Disco since 2014 ramp its usage and spend on Disco by more than 6x in Q1 2022 compared with highest historic spend quarter. This is a great example of a couple points we like to talk about. One, our viral adoption, and two, multi-product usage and expansion. The lead lawyer who used DISCO at a prior firm moved to his new firm and championed the increased use of DISCO on new matters and among other partners at the firm. This firm has steadily added new e-discovery matters and more recently chose Disco Review for a large, highly complex, multiple defendant, multiple plaintiff case. This specific review matter had over 1 million documents under review using Disco over the last quarter. And notably, the client quoted Disco's AI as being a huge benefit in getting the evidence in a timely manner, faster than they initially thought possible. Lastly, we were very happy to have one of our oldest and largest clients and one of the first ML100 law firms to fully adopt Disco renew their multi-year subscription agreement with us. This type of long-term relationship is one we want to achieve across all clients and reaffirms their belief in the benefits of adopting and using Disco's products. They have demonstrated to their clients that they are at the forefront of adopting innovation in law. We also, once again, participated and sponsored Legal Week in New York City, one of the premier legal industry conferences. During Legal Week, our team participated in thought leadership panels, conducted numerous product demos, heard tremendous positive feedback about the acquisition of our hold and request products, and made great connections with potential new clients who we are excited to continue the dialogue with and to share the benefits of Disco. In summary, we are thrilled to have had another strong quarter. And as we communicated last quarter, we will continue to invest behind our growth and scale the Disco organization to best serve our clients now and in the future. And with that, I'll turn it over to Michael.

Thank you, Kiwi. I'm pleased to discuss the details of another strong quarter and provide guidance for Q2 2022 and an update on our outlook for fiscal year 2022. I'd like to reiterate that our business is primarily a usage-based model that is driven by the number and nature of matters, volume of data, length of time on the platform, and other factors that may impact revenue in any given quarter. As Kiwi mentioned, Q1 revenue was $34.5 million up 63% year over year. We had strong performance with growth coming from increasing usage from existing customers and new customer wins, particularly in e-discovery, as well as increased usage across all of our products versus the same quarter in the prior year. In discussing the remainder of the income statement, please note that unless otherwise specified, all references to our expenses, operating results, and share count are on a non-gap basis. Our gross margin in Q1 was 74% up from 73% in Q1 of the prior year. As a reminder, our gross margins fluctuate from period to period based on, for example, the amount and types of data ingested and managed on our platform. We expect gross margin to continue to be within the bands we've historically seen. Sales and marketing expense in Q1 was $15.6 million, or 45% of revenue, compared to 37% of revenue in Q1 of the prior year. This represents an increase of over $7.8 million in the quarter year-on-year. As we've previously mentioned, we are focused on expanding and investing in our go-to-market organization. We have historically been very measured and efficient in our go-to-market organization and feel that now is the right time to invest and scale along with the sustained levels of elevated growth we've achieved in the U.S. and internationally. We've made key hires to help with this effort, including our new head of human resources, Jignasha Grooms, who started with us a couple weeks ago. Jignasha brings key expertise and experience in scaling international operations across functions. Research and development expense in Q1 was $10.9 million, or 32% of revenue, compared to 29% of revenue in Q1 of the prior year. This represents an increase of over $4.8 million and a quarter year-on-year. as we continue to invest in our products, platform, and new features to help our clients. General administrative expense in Q1 was $7.7 million, or 22% of revenue, compared to 18% of revenue in Q1 of the prior year. This represents an increase of over $3.8 million in the quarter year-on-year. We have strategically added to our G&A organization following our IPO to support the increasing scale of our business. Operating loss in Q1 was $8.6 million, representing a margin of negative 25% compared to negative 11% in Q1 of the prior year. Adjusted EBITDA was negative 7.8 million in Q1, a margin of negative 23% compared to a margin of negative 9% in Q1 of the prior year. Overall, our EBITDA was better than guidance due to the increase in revenue and some hiring, onboarding, and other investments pushed from Q1 into Q2 and further quarters. Net loss in Q1 was $8.6 million or negative 25% of revenue compared to a net loss of $2.4 million or negative 12% of revenue in Q1 of the prior year. Net loss per share in Q1 was $0.15 per share compared to a net loss per share of $0.18 in Q1 of the prior year. Turning to the balance sheet and cash flow statement, we ended Q1 with $238.6 million in cash and cash equivalents. Operating cash flow in Q1 was negative $11.4 million compared to negative $4.5 million in Q1 of the prior year. Now turning to the outlook. For Q2 2022, we are providing revenue guidance in the range of $32 to $34 million, representing 12% year-over-year growth at the midpoints. For Q2-22, we are providing adjusted EBITDA in the range of negative $17 million to negative $15 million, representing adjusted EBITDA margin of negative 48% at the mid-term. As I mentioned on our last quarterly call, we do anticipate operational costs to continue to grow in Q2 and throughout the year as we continue to invest in our product. Full fiscal year 2022, we are raising our revenue guidance in the range of $149 million to $153 million.