CS Disco, Inc.

Ladies and gentlemen, thank you for standing by and welcome to CSDISCO's fourth quarter and fiscal year 2023 conference call. At this time, all participants are in a 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 now like to 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 fourth quarter and fiscal year 2023. With me on today's call are Scott Hill, DISCO's 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 our future performance, our future capital expenditures, market opportunity, 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 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 belief 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 quarterly report on Form 10-Q for the quarter ended September 30th, 2023, filed with the SEC on November 9th, 2023, and the company's upcoming annual report on Form 10-K for the year ended December 31st, 2023. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to, and either substitute for or superior to, measures of financial performance prepared in accordance with GAAP. Reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus the closest GAAP equivalents is available in our earnings release. And with that, I'd like to turn the call over to Scott.

Thanks, Alexi. Good afternoon, everyone, and thank you for joining us. I would like to start with a few comments on a strong end to 2023 before turning to our objectives for 2024. Fourth quarter total revenue increased 10% versus last year to $35.7 million. Full year 2023 total revenue was $138.1 million, up 2% from the prior year. Software revenues, which include revenues from eDiscovery and other software product offerings, grew 5% to $29.3 million in the fourth quarter. For the full year, software revenues grew 3% to $112.3 million. We had 1,441 customers as of December 31st, 2023, which is 9% more than a year ago. Importantly, we had nearly 300 customers that generated more than $100,000 in revenues in 2023. up 9% compared to 2022. The number of customers who generated more than $1 million in revenue also expanded to 26 during 2023. And finally, we saw multi-product attach rate improve to 15% at the end of 2023, up from 11% at the end of 2022. We have more customers spending more money and buying more of our product. and we believe there is meaningful room for additional expansion in our existing customer base. Services revenues, which include revenues from DISCO review and professional services, were $6.5 million in the fourth quarter. Full year services revenue was $25.8 million flat from the prior year. Q4 2023 adjusted EBITDA was negative $1 million. Fiscal year 2023 adjusted EBITDA with negative $25.9 million. We ended the year with just under $160 million in cash on our balance sheet. 2023 was a year of change for Disco, but we're pleased with the return to growth we saw within our software business exiting the year. As we turn to 2024, we are focused on continuing to reaccelerate our revenue growth Investing to enhance our software product offerings, including advancing our innovative Cecilia capabilities and strengthening our operating framework to improve our efficiency and profitability. And importantly, under the strong leadership of our Chief Human Resources Officer, Karen Herkes, we are building a stronger cultural foundation that we believe will be critical to sustaining our success. Let's start with continuing to re-accelerate revenue. We struggled with a number of distractions during 2023, but I'm proud of how the team executed and delivered a solid end of the year. And importantly, I'm very confident that we have the leadership and team in place, focused, and motivated to build on that momentum. Of particular note, we're fortunate that Andrea Papavez agreed to step in as our Senior Vice President of Global Sales. Andrea brings over 30 years of experience in the legal industry across all segments having led sales teams for over 20 years at LexisNexis and over seven years at Epic. She hit the ground at full sprint and has already improved and accelerated a number of our key initiatives. The great news is that we have always had a large addressable market, a growing customer base, and industry-leading products. I believe we are now developing and deploying the right sales approach to capture a greater portion of that significant opportunity. Entering 2024, we have taken a number of steps to improve our sales execution and drive our software dollar-based net retention back above 100% from 97% exiting 2023. We have bifurcated our customers into specific profiles and are developing sales motions that better reflect the nature of those distinct groups. We have reorganized our sales team to reflect these groupings and their needs. We've enhanced our sales plan, committed to a more constructive channel partnership, and refined our pricing strategy. We have also combined our services and customer success functions under Melanie Antone's leadership as our chief customer officer to reposition customers at the center of what we do. We believe these initiatives will improve our customer satisfaction and MPS scores and enable consistent revenue growth across both existing and new customers. In support of these sales and customer initiatives, we are refining our investments in lead generation, marketing, and brand awareness, and we are already seeing signs of progress. Since the launch of the Lady J campaign last year, we have seen organic searches for Disco Triple, and we have received over 10 million views and 32.8 million impressions across various platforms. A third-party survey of over 1,000 US-based legal professionals indicated that we are now the most cited e-discovery technology platform among all of our competitors. It's very common for us to hear new leads and customers mention the Lady J campaign as they first begin their disco journey. We must now do a better job in 2024 of converting this increased awareness into revenue growth. Our product and engineering teams are also doing a great job of supporting our sales efforts by continuing to enhance our industry-leading eDiscovery offering at an unprecedented pace, while also further developing our market-leading Cecilia AI capabilities and our innovative legal platforms, including Case Builder, Hold, and Request. With Cecilia Q&A now generally available in the U.S., we were able to sign our first several customers. The customers were a combination of law firms and large corporate users, and we are already hearing some great feedback. It was exciting to hear the founding partner of a leading Houston-based law firm explain to us the benefits they were receiving from Cecilia. He mentioned they are using Cecilia on a very large database with over 1.4 million documents and a very tight deadline. They demonstrated to their end client how Cecilia could ultimately save them hundreds of working hours and help accelerate the speed and quality of the work at the same time. This partner also told us how he himself is able to use Cecilia to find answers to very specific questions with only a couple of clicks, while his team finds it far easier to get started and execute reviews with Cecilia. The early success we are seeing with Cecilia isn't expected to be a large contributor to our 2024 revenue, but it is certainly opening doors to new and existing customers and is laying the foundation for future growth by extending our lead and innovation in the legal industry. It also demonstrates why we believe it is imperative that we continue to invest to enhance our e-discovery offering, including advancing our innovative Cecilia capabilities. During 2023, our product and engineering teams worked together to release major AI innovations, including Cecilia Q&A, which increases the efficacy and efficiency with which lawyers review documents, and Cecilia Timelines and Tagging, which enhance the way lawyers prepare cases. Our product and engineering teams have also been hard at work on Cecilia Auto Review, which is now in private testing and has the capability to significantly automate and improve the accuracy and quality of large, tedious document reviews. As we pivot to 2024, we expect the rate and pace of innovation to continue as we add additional skills to our Cecilia AI platform. We announced the launch of Cecilia Deposition Summaries at Legal Week in January. This generative AI-driven solution enables legal professionals to automatically create deposition summaries, which have traditionally been a tedious and time-consuming task. Our team is also working to integrate the primary law asset, which we licensed in late 2023, into Cecilia, which will marry facts with law on a single technology platform for the first time. We anticipate launching primary law capabilities later this year. And while we're excited about Cecilia, the key to our success in 2024 remains our core e-discovery software and services offerings. During the fourth quarter, we continued to deliver key functionality that our customers need, including deeper integration capabilities between timelines and e-discovery, new capability to track user activity and last accessed user information, production sharing, which allows lawyers to securely and easily send legal productions to a third party, and work product permissions, which allows users to keep work confidential from document viewers such as expert witnesses. In January, our team delivered the ability to sort on a custom field, which is one of the most asked for enhancements on our roadmap. Our product and engineering teams are extremely talented and dedicated, and I'm confident that 2024 will be another banner year in product development that will delight our customers, enable revenue growth, and strengthen the foundation of our future success. We're investing in local and globalized talent to supplement capacity while we continue to build a comprehensive litigation platform which we believe will truly transform the way legal work gets done. We believe we are positioned to return to meaningful growth with a much more precise focus on serving our customers. We will invest to solidify our technology footprint, enhance our core offerings, and build our lead in product innovation. We intend to do all of this while also vigilantly focusing on the strength of our balance sheet and cash generation. In order to do that, we must strengthen our operating framework to improve our efficiency and profitability by developing the processes, systems, and infrastructure necessary to scale efficiently and profitably. One important initiative that we will continue is expanding our presence in India to enable additional future efficiencies. In 2023, we grew our employee headcount in India from zero to over 100 employees. We anticipate approximately 20% of our workforce will be based in India by the end of this year. We are also working to enhance our CRM processes and systems and rebuild our customer success and sales ops functions. We will enhance our security and controls capabilities and develop an improved quote to cash process as well as enhancing other key back office processes and systems. These are critical initiatives that will enable our future ability to scale. Finally, while the board continues to evaluate a strong set of candidates to be DSCO's next leader, I remain fully engaged as CEO, and I'm very excited about 2024. As I enter my sixth month in the role, I want to reiterate some of the things I mentioned on the last earnings call over three months ago. I remain convinced in the amazing talent, the industry-leading products, the sizable market opportunity, and the strategic roadmap we have at Disco. I now believe we have also made significant and necessary improvements to our culture and our go-to-market approach. But something else became clear in the time that I've spent in this role. We had stopped investing in our peoples. We cut key sales functions and fuel capacity to save money without having a cohesive go-to-market strategy. We reduced R&D capacity to the detriment of our product roadmap. We asked our G&A resources to work harder without addressing key system and process gaps. Those actions pushed us closer to profitability, but not in a sustainable way. As I've said in my remarks this afternoon, we are going to invest in correcting those missteps. We believe these investments, combined with re-accelerating revenue growth, will put us on a sustainable path to profitability during 2025. The opportunity is there. Now we have to execute. With that, I'll turn it over to Michael.