CS Disco, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the CS Disco second quarter of fiscal year 2023 conference call. At this time, all participants are in listen-only mode. 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 the pound key. I would like to now hand the conference over to your first speaker today, Head of Investor Relations, Alexey Lakshakov. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss the financial results for Disco's second quarter of 2023. 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. Today's call will include forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding our financial outlook and future performance, our future capital expenditures, market opportunities, market position, product strategy and growth opportunities, and developments in the legal technology industry. In addition to our prepared remarks, Our earnings press release, SEC filings, and a replay of today's call can be found on our industry 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 in the company's quarterly report on Form 10-Q for the quarter ended March 31st, 2023, filed with the SEC on May 10th, 2023, and the company's upcoming Form 10-Q for the quarter ended June 30th, 2023. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and that are substitute for or superior to measures of financial performance prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP financial measures and the 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.

Thanks, Alexei. Good afternoon, everyone, and welcome to our earnings call for the second quarter of fiscal year 2023. Revenue for Q2 2023 was $34.3 million. Adjusted EBITDA was negative $7.4 million. And we ended the quarter with 1,431 customers, up 14% year over year. Both revenue and adjusted EBITDA were above the high end of our guidance range, with adjusted EBITDA improving by over $5 million year over year, and adjusted EBITDA margin improving by more than 1,700 basis points quarter over quarter. We are pleased with our results and our progress toward profitability. On prior earnings calls, we discussed the various sales and marketing performance drivers that are improving. We discussed seeing continued customer count growth and improvement in pipeline metrics, such as meetings, near-term opportunities, and wins. That improvement continued in Q2. Compared to Q2 of last year, total meetings were up 30% and near-term opportunities were up 20%, while at the same time, we have continued to enjoy the high win rates that we have experienced since our IPO. Inbound leads have more than doubled year over year, in part as a result of our recent investments in marketing. While we have continued to see some reductions in usage due to cost optimization, especially from our largest customers, our accelerating sales activity is allowing us to offset these reductions by bringing new customers and matters onto our platform. These positive signs tell us that our efforts to increase usage and accelerate product adoption are working. Last year and early this year, we promoted several classes of sales development representatives, or SDRs, to quota carrying and count executive roles on our inside sales team. These internally promoted reps have seen strong early success, with all reps producing revenue within their first 90 days in role, and some reps already producing more than $1 million in annualized revenue. We believe that the experience SDRs gain through their time in our SDR program, experience that familiarizes them with the DISCO product suite, our customers, the legal industry, and legal workflows, and the way successful sales leaders at DISCO sell helps them achieve this kind of rapid success as quota-carrying reps. We believe the pipeline of talent from SDR to inside sales and eventually to other functions, such as customer success and field sales, will be an effective and efficient way of growing our sales team going forward. Already, many of our top performers in these roles are alumni of our SDR program. In our review business, we have seen a rebound in activity this quarter, both in the scale of our total pipeline and the size of the deals in our pipeline. One of our key operational initiatives has been increasing the percentage of our sales team that sells reviews successfully. In the first half of this year, more than 60% of our quota-carrying reps generated review revenue, which is almost double the percentage who did so in the first half of the prior year. We have also seen some increases in larger reviews, with one customer that had multiple reviews in the quarter, generating more than $1 million in review revenue in the quarter. This quarter, I would like to highlight a large international law firm that has been a Disco eDiscovery user for more than five years. This customer has over 120 matters running simultaneously on Disco and generated over $3.5 million in total revenue over the last 12 months. More recently, they have become recurring users of review, with three reviews active in Q2 and several more in the pipeline. Overall, this customer finds that our platform helps them complete legal document review more quickly and efficiently across a wide range of legal matters around the world. Another customer, a global publicly traded shipping company and their AMLO 100 law firm, has been using DISCO for a large global antitrust matter. They began using DISCO in Q4 of 2022, and have since increased usage to more than $200,000 this quarter. This customer selected Disco after a rigorous review of our capabilities against our peers. Disco stood out as the company with the most robust technology for handling large datasets and complex review workflows quickly. It has been an exceptional partnership for us and a perfect example of Disco's global reach and impact. Now let me turn to R&D. Last earnings call, we discussed Disco AI and how our AI capabilities are integrated into our platform and product. We discussed key features powered by AI, such as topic clustering with automatic indexing, predicted tags, and cross-matter AI. We also introduced Cecilia, our integrated AI chatbot for large-scale e-discovery. We continue to believe that our decade-long investment in our AI lab and in AI feature engineering, the private data that we have attracted to our platform, the fact that our platform is already the system of engagement for a variety of legal workflows that precede and follow the use of AI, and the trust we have earned in the market as a company that productizes cutting-edge technology for legal use cases in a reliable, user-friendly, and secure way, all position us well to lead the legal industry's adoption of AI. While investment in AI is important, it is also important that we continue to deepen our core non-AI product capabilities. We released three key features in this category this quarter, all of them long demanded by our existing customer base. First is dynamic threading. In a typical email chain, Later messages contain copies of earlier messages. When reviewing such an email chain, it is useful to identify the emails that contain unique content and suppress the emails that are included in other emails so that lawyers do not waste time reviewing the same content multiple times. For a long time, DISCO has had the capability to limit reviews to emails with unique content, often called inclusive emails. But Disco has identified inclusive emails on a global basis, considering all emails in a given review database. In some reviews, customers prefer to identify emails with unique content from a subset of documents. For example, the documents that fall within a certain date range. Dynamic threading allows customers to identify emails with unique content in arbitrary subsets of the documents. and to do so dynamically, that is, in real time, as users set up review stages in Disco eDiscovery. With dynamic threading, customers can, for example, define a review universe using complex searches by keyword, date, or AI-predicted tags, then reduce that review universe by identifying emails that contain unique content and suppressing other emails. This allows customers to further limit review population and thereby accelerate the process of legal document review. Another exciting product released this quarter is in-app translation. This functionality allows customers to translate documents between over 60 different languages right in the DISCO platform. Today, lawyers tend to use either expensive third-party translation services or online translation features intended for consumer use cases. that, while free and convenient, may leak private data to translation providers. With in-app translation, lawyers can translate documents with the click of a button and do so securely with none of their data leaving the Disco platform. We also released a cloud connector for Office 365 email. This allows customers to ingest emails directly from Microsoft Outlook with no intermediate collection or download steps. Today, lawyers frequently have to export data and then repeat the process for any subsequent collections. With the Outlook Cloud Connector, customers can ingest e-discovery data themselves, with the data flowing directly from Microsoft to Disco. As more corporate data moves to the cloud, we believe that direct connectors like this will become a more and more common way of securely collecting data for legal matters. These connectors build on our hold capabilities, which already allow for preservation in place in a variety of cloud systems, including Office 365. Now let me share our progress on Cecilia. We are on track to have Cecilia generally available to our customers by the end of this year. In Q2, we began piloting Cecilia with a select customer group. The feedback we have been receiving has been overwhelmingly positive. Cecilia is able to rapidly answer specific questions based on data contained in customers' private databases, while citing specific documents and document excerpts to support her answers. In one instance, Cecilia found an important document that the legal team had not found in their original review using traditional review methods. An associate on a separate legal team mentioned that Cecilia would have saved their client thousands of dollars and saved the associate many hours of document review. This is the kind of impact we are aiming to have. We believe Cecilia will be a big improvement for our customers and look forward to continuing to expand our Cecilia user base in the coming months. We have noticed that our approach to AI is different from that of many of our competitors, in that we are LLM agnostic. We believe that as the years pass and technology matures, there will be many winning LLMs with different strengths, weaknesses, and optimal use cases. We have engineered our AI platform so that we can use different models for different tasks, including both internal models and third-party models. We believe that flexibility, rather than going all in on a single LLM or LLM provider, will give us an advantage in bringing the best product capabilities to market and doing so efficiently. We look forward to announcing our next set of AI capabilities in the coming quarter. We are happy with the progress we made this quarter and all of our team's accomplishments. With that, I will turn it over to Michael.