CS Disco, Inc.

2024 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, Oleski Lokchakov to go ahead.

Good afternoon and thank you for joining us on today's conference call to discuss the financial results for DSCO's second quarter of fiscal year 2024. With me on today's call are Eric Fredrickson, 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 future performance, the impact of changes to our executive leadership, our future capital expenditures, market opportunity, market position, product strategy, and growth opportunities, the benefits of our product offerings, and developments in the legal technology industry, including those related to the role of artificial intelligence. 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. Overlooking 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. Following 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 31, 2024, filed with the SEC on May 9, 2024, and the company's upcoming quarterly report on Form 10-Q for the quarter ended June 30, 2024. 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. Reconciliations between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus the closest GAAP equivalent is available on our earnings release. And with that, I'd like to turn the call over to Eric.

Hello everyone and welcome to Disco's second quarter of 2024 earnings call. I'm happy to be here with all of you and to share the results and discuss our go-forward strategy and plans for Disco. Since I joined Disco on April 29th, just over 100 days ago, I've had the opportunity to learn about the business, to meet with many of our top customers, and to get to know the people throughout Disco. I am excited to share my thoughts and my reflections. However, first, I'd like to go through the available results. Total revenue for the second quarter of 2024 was $36 million, up 5% versus the same quarter last year. Software revenue in Q2 was $29.3 million, up 8% over the prior year. This was the fifth quarter in a row of year-over-year growth for our business and a new high watermark for our total revenue. Services revenue was $6.7 million in the second quarter. Adjusted EBITDA was negative $4.7 million or negative 13% adjusted EBITDA margin. We ended the quarter with 1,449 total customers $130 million of cash and no debt. There are many exciting things that I want to discuss this quarter. While our team made considerable progress in sales and product development, our ultimate goal is to accelerate revenue growth and to further strengthen our position in the market. On today's call, first, I will share my observations from my first three months at Disco. second i will highlight our primary areas of focus and our approach to accelerating revenue growth third i will share some exciting updates on the product front from my initial observations i am more convinced than ever that disco is a fantastic company with a bright future i visited all of our offices across the globe and met with many employees in various departments it is clear that we have high caliber eager and talented employees who are dedicated to Disco. We have some of the brightest minds in the legal technology industry who have a strong ambition to deliver the absolute best products and services to our customers. I've also met face-to-face with over 20 customers, mostly from our largest AMLA 100 and corporate customer base. Hearing directly from our customers has been enlightening. Their appreciation for our solution is evident. They have used competitors' products in the past, which provides them with very valuable reference points. Consistently, customers express their love for our products ease of use, workflow efficiency, speed, and reliability. They love that Disco is a significant improvement over the legacy solutions that they've used in the past. I heard stories directly from these customers about saving hundreds of hours of work by switching to Disco eDiscovery finding pivotal evidence quickly with Cecilia Q&A, and gaining significant value by leveraging our services team as a true strategic partner. Virtually every customer that I met with made it clear that they want to do more with Disco. It's clear to me that Disco is in a solid position to make the most of the market opportunity. So in terms of where we'll focus, it's all about customer focus, operational effectiveness, and cultural improvement. Those are the three areas that will drive our revenue acceleration. Becoming a customer-focused organization is absolutely paramount. Over the last few months, we segmented our customer base and began shifting resources to focus the attention on our most important top customers and prospects. We have a platform that's highly valued by legal teams and a services organization that provides world-class experiences and outcomes. However, I heard firsthand from several Disco champions at our largest customers that they need Disco's help in promoting our platform within their organizations. We're executing on a plan right now to enable our customer champions to do exactly that. Our industry and the problems we solve are complicated. The U.S. and international legal systems and regulations have unique rules and requirements and complex workflows that our solutions are designed to address elegantly. Because of the complexity that's inherent in our space, our sales and marketing team needs to be exceptionally well enabled to understand the customer's needs, their roles, and the related value propositions. We're rebuilding our sales enablement function to help do just that. We will improve how we communicate Disco's value, navigate potential objections in the sales process, and sell the entire platform offering, not just a point solution. We're focused on adding high-caliber sales leaders who are experienced in sophisticated account-based enterprise sales motions. We believe that augmenting our existing reps with talent that is experienced in enterprise-level sales will elevate our performance across the board. We've already added several talented quota-carrying sales reps and managers just this past quarter. and we'll be focused on adding additional talent in the coming quarters in line with our plan. We have started to resource and align our marketing, sales development, and customer success teams to our top customers, which are predominantly big law, corporate, and larger litigation boutiques. Finally, when it comes to customer focus, we are rolling out an account-based targeting strategy to ensure that demand generation is focused on our top account priorities, and we're shifting a significant amount of field marketing resources to better support a more focused customer set of events. We've added key senior roles within marketing this quarter, including a vice president of demand generation to support this initiative. We believe that these changes, as well as other initiatives that we're currently working on, will drive better experiences and outcomes for our customers and result in more demand for our software. Next, we need to enhance elements of our internal operations to drive organizational effectiveness and customer outcomes. I'm pleased to announce that Richard Crum has joined Disco as our Chief Product Officer. I worked extensively with Richard at Emberse, and he will bring a wealth of experience to Disco from his time leading B2B organizations. Richard is customer focused and commercially minded, and he brings an intense focus and discipline to our product team. Richard has a long legacy of growing people and aligning cross-functional teams around clear sets of priorities. We're also working to improve the effectiveness of our internal end-to-end business processes and systems, especially as they relate to the quote-to-cash lifecycle. These improvements will enable a faster and more scalable approach to sales, improves customer experience, and enhance visibility into the effectiveness of our business decisions. This effort is well underway and is key to scaling our revenue. Customers love our products, and we want to ensure that our operational approach is a tailwind to further winning and growing our customers. Lastly, cultural improvement is about ensuring that Disco is an enjoyable and rewarding place to work. It's a win-win. Engaged and satisfied employees will better serve our customers, who will reward us with more business as a result. We have done significant internal work around culture, including improving our practices to promote a transparent, healthy, and collaborative work environment. The data shows significant improvement in our culture already, and energy in the Disco hallways is palpable. When push comes to shove, culture starts at the top, and I'm committed to ensuring that Disco builds a remarkable reputation based on integrity, ethics, and respect. As Peter Drucker said, culture eats strategy for lunch. Continuing down our path of building a strong company culture will be a key ingredient in our future success. We have a journey ahead of us to enable this business and it will not happen overnight. We are taking very clear steps in the right direction. Michael will speak more to this, but from a cost perspective, we don't expect a material change to our adjusted EBITDA in 2024. Now, I would like to focus on some customer highlights and the great work our product team has done over the past quarter. I was thoroughly impressed during a recent visit to one of our large AMLAW customers. This firm, which has a long-standing relationship with Disco and manages a significant number of matters on our platform, is currently piloting Sicilia Q&A on a complex matter. As a reminder, Disco Sicilia Q&A is a tool that allows users to use natural language questions about the documents in their databases and receive detailed narrative responses along with specific source citations. So the customer chose this particular case for the pilot due to its size, with over 3 million documents, and its subject matter was complex and rendered traditional search techniques less precise and less effective. The ability to ask questions and receive responses with documented support was highly appealing to the customer. The case team was impressed with Cecilia Q&A's ability to submit questions and receive responses with references to supporting documents. Effective querying of a large population of documents that led to finding key documents also helped the legal team quickly provide their client with initial takeaways and actionable recommendations. This pilot's early findings demonstrate Cecilia Q&A can be a powerful investigative tool early in a case. In this example, Cecilia Q&A could be leveraged much more effectively than traditional search to prove or refute allegations of generic misconduct. Relying on Cecilia Q&A's ability to understand subtle language, the legal team was able to identify highly relevant documents very early on with a limited number of tailored natural language questions. The legal team is now using these documents to assess potential risks to formulate a broader strategy for the case and to assist the client in making informed decisions. Next, we are pleased to announce the launch of Cecilia AutoReview, now generally available and set to be showcased at the ILTA conference next week. In our testing with top AMLAW firms, the results were outstanding. Cisco's testing of Cecilia AutoReview on customer data demonstrated review speeds of 3,800 documents per hour over a 24-hour period. equivalent to a 140-person review team working an eight-hour day, and precision and recall metrics 10% to 20% higher than typical from human reviewers. Our customers can now leverage this technology on live cases to accelerate their reviews. Firms adopting this technology will revolutionize their workflows, reducing first-pass review times from weeks to hours while maintaining or even improving quality. Using natural language to describe tags and documents to be tagged, Cecilia AutoReview offers an efficient and effective solution. We're very excited to bring this powerful technology to our customers. Cecilia Q&A has shown promising growth in its first six months since it's been released. We're seeing positive feedback from our customers and early indication showing meaningful uplift in software revenue for matters where Cecilia Q&A has been implemented. We already have a number of customers eager to begin using Cecilia AutoReview. However, we're cautious that material adoption of these technologies will take time, and we don't anticipate significant revenue impact in the current year. The heartbeat of our platform remains eDiscovery. It is our core offering and ultimately what the vast majority of our customers care about most today. We are committed to providing the leading solution in the market and reflecting our customers' feedback in the upcoming product releases. In Q2, we had a significant capability release called in-app mass redactions. This is a key eDiscovery functionality because it is specifically targeted for large matters and enables users to redact thousands of gigabytes worth of data at once. Orderers will no longer need to draw redaction boxes over sensitive data scour documents one by one for sensitive information, and spend expansive hours on this task. Now, information like credit card numbers, social security numbers, addresses, or other specific terms and patterns can be redacted with a simple user interface. This release has been frequently requested, and we're excited for our customers to start relying on it. In summary, it's been a wonderful first 100 days at Disco. We had strong revenues this quarter. Our business is growing. We have over 1,400 satisfied customers and amazing product outcomes. I'm impressed with our team and I'm energized by our customers. We know what we need to do and we are getting everyone aligned around the same priorities. I am proud of what our team has accomplished over the last few months and I'm incredibly optimistic about our future. With that, I'll turn it over to Michael.