CS Disco, Inc.

a more customer-focused organization, primarily by strengthening our go-to-market motion, enhancing our internal operations, and fostering our continued cultural improvement. Well, I'm pleased to tell you that the changes I discussed last quarter are already starting to show positive signs. We're seeing growth in revenue and in the number of customers in the cohort of customers that spend over $100,000 with Disco. We're also seeing greater usage of our platform overall, and we're seeing software dollar net retention improve. Next, I want to discuss the additional actions that we're taking that are in line with our strategy. We're deeply committed to being the best partner to our customers, and we made material strides towards that goal in Q3. Recently, we made several strategic hires within our sales team. We're excited that Lauren Caruso has joined Disco as our SVP and Chief Sales Officer. Lauren was a longtime Disco employee and one of our most effective sales leaders before she left the company about two years ago. Lauren has a history of developing strong performing teams, who are capable of successfully scaling and expanding customers at Disco year over year. We welcome her as our Chief Sales Officer. Andrea Popovitz will continue to serve as a senior leader within our sales organization, reporting to Lauren, and she will focus on leading many of our key sales teams. In addition, we further welcomed two new sales leaders to focus on our largest law firm and corporate customers. They are both seasoned veterans in sales and legal technology, having worked at companies like Epic, Everlaw, and LexisNexis. These key additions are bringing in valuable expertise across the board, from deep industry knowledge and sophisticated sales approaches to coaching and mentoring. These changes allow us to drive a more refined, enterprise-grade sales motion with an up-leveled talent pool. which clearly reflects our strategic go-to-market shift towards larger customers. Focusing now on customer highlights, this quarter we signed a number of notable customers, including several Fortune 500 and other large companies. We're excited about this because for many of these customers, this is the first step on their way to digitally transforming their legal operations and moving to a centralized provider of legal technology. An example of this is a large bank which evaluated several solutions before selecting Disco. They selected Disco Hold after a rigorous review of our product's capabilities and security features, and they have committed to a three-year Disco Hold agreement. Earning their trust and positioning ourselves as a strategic partner was a significant achievement, and we're excited about the potential for this partnership to grow. Another customer with whom we recently signed a multi-year deal is a leading online food delivery platform. This customer welcomed a new legal team leader who had experience with DISCO at their prior firm and wanted to implement DISCO at their new organization. They loved the simplicity and intuitive workflow of the DISCO platform and implemented our capabilities via a multi-year spend commitment that provides access to our entire platform starting with LegalHulk, which is now being implemented. We continue to see this dynamic where champions of disco who switch companies or firms implement our platform in their new organization. We're excited about these partnerships and other important wins, and the start of what we're confident will be great long-term partnerships. The traction we're seeing this quarter is, in part, the result of improved operations across the organization, I'm seeing strong cross-departmental collaboration. We're seeing thoughtful, comprehensive solutions to our customers' challenges, incorporating feedback from multiple departments, and leveraging the expertise of our new talent. Product strategy, customer experience, sales, and finance are working together in a deeper, more integrated way. We're being proactive with our customers, engaging with them, and responding with richer platform-wide solutions that draw on sales, product, and services teams. This is exactly what we're aiming for. And as a result, we're seeing increased involvement in larger, longer-term opportunities. As we mentioned in the last earnings call, we're focusing our resources on customers who we believe will drive the most long-term value for Disco. These are customers with significant annual e-discovery spend, large practice areas, and practices and legal areas with significant e-discovery needs. The actions we're taking now will allow us to grow with existing customers and future customers who fit this criteria. Operationally, we've made significant strides, including adding two new senior leaders to the team. Susan Garcia has joined us as General Counsel and Chief Compliance Officer. And Joe Jacobson has joined us as Senior VP of Operations. Susan comes to us from WebMD, where she served as General Counsel since 2021, overseeing legal strategy, corporate governance, compliance, litigation, corporate transactions, and ESG. I'm particularly excited for Susan to help us accelerate deal closures and drive efficiency in our legal processes. She brings deep expertise in optimizing playbooks for contracts, which will help further streamline sales and is already well acquainted with Disco, having used our platform in the past. We're thrilled to have her on board. We've also welcomed Joe Jacobson as Senior Vice President of Operations. Joe brings over two decades of experience in business transformation, operations, revenue management, and sales enablement within the technology and SaaS sectors. Joe and I worked together for several years at Concur. And most recently, he served as Vice President of Revenue Strategy, Operations, and Transformation at Brex, an AI-powered expense management platform. At Disco, Joe oversees business operations, revenue operations, business intelligence, and go-to-market operations support and enablement. Joe already hit the ground running, and he's made an impact by helping the company align and execute on key priorities, and setting a fast pace for achieving success. This spans all areas of our business, from product and engineering, to services, to finance, but Joe's primary focus right now is to improve our go-to-market operations. Joe's driving deeper strategic thinking, rigorous prioritization, and rapid execution, all of which are helping propel the business forward. Key initiatives, such as increasing customer wallet share, Refining ideal customer profiles and optimizing our quote-to-cash process are critical to enhancing our sales and our overall company operations. I'm excited about Joe's efforts because it's going to enable us to be more strategic with where we focus our resources and how we target our customers, and will ultimately maximize the return of the effort of our go-to-market teams. On the product and engineering front, we are proud of the rapid progress our teams have made in bringing cutting-edge generative AI products to market. We believe we currently have a more comprehensive set of capabilities than anyone in the market, and feedback from customers is that we're the industry leader. We aim to maintain our leadership position by continuing to build the best and most innovative legal platform in the industry, and Richard is here to help us drive that mission. As we look ahead to the rest of Q4 and into 2025, we will focus on delivering products and capabilities within our core eDiscovery platform that offer the highest near-term value to our customers. We will also enhance our facility capabilities. This includes a deeper focus on emerging data types, advanced integrations with communications platforms, enhanced search and review capabilities, and improvements in data management, administration, and permissions. Our approach will continue to be shaped by collaborating with and listening to our customers, and we will also continue to deliver the core platform enhancements that will enable us to move off the chain to larger customers, larger matters, and larger wallet share. At the same time, we've leveraged our internal expertise to develop innovative solutions to broader industry challenges. So there's a balance there. It's a balance between delivering what customers say that they want while reimagining how legal work is done. Richard and his team will be the key driver in this regard. With this strategy, we aim to release capabilities and solutions that lawyers can adopt quickly, make a noticeable impact off the bat, and lead to more work done in the DISCO platform. Ultimately, our goal is to accelerate revenue in an efficient and sustainable manner and ensure that our product strategy and engineering efforts are aligned with this goal. On this call, I discussed many actions that were taken to improve how DISCO is selling, building, and operating. Many of these activities require some new talent and experience. To support these efforts, we are realigning where we are investing dollars and enhancing the skills that we need at DISCO in the future. We assessed our current talent at DISCO and made the difficult decision to eliminate a small number of roles while opening positions in other areas. Many of those affected are not just employees and coworkers, but friends. We're appreciative of their hard work and contributions and wish them great success in their next role. In order to ensure that we have the right talent and experience moving forward, we simultaneously opened several new roles in field sales, customer experience, sales enablement, product management, and engineering. We will look to hire seasoned experts with a proven track record of successful execution. This strategic decision was not taken lightly, and the sensitivity of this moment is not lost on me. Saying goodbye is not easy. especially as culture is very important to me. Culture has been a top priority in every leadership role that I've held, and it's especially true here at Disco. I believe that strong cultures foster healthy workplaces, more creative ideas, more productive employees, better outcomes for customers, and better performance for investors. In regards to culture, this quarter we rolled out new company values, which set the standards for Disco. and were created by our employees. These values are think forward, give space and grace, lead with stewardship, and step up to the challenge. These values now drive our decision-making, actions, and performance, and we take them seriously. This is an important step in our cultural evolution, and I'm confident that the changes we are making will allow us to realize all of them. So in aggregate, I'm excited about what I've seen throughout Q3 at Disco. We are moving faster as a company, collaborating more effectively across the organization, and competing for and winning larger deals. I see a revitalized and energized Disco team driven by one goal, to become the leading legal technology platform in the industry. I'm looking forward to what Q4 and 2025 holds. With that, I'll turn it over to Michael.

Thank you, Eric. In Q3 2024, total revenues were $36.3 million, up 4% year over year. Software revenues were $30.2 million, up 6% year over year. September saw an especially strong software usage net inflow. Services revenue were $6.1 million, down 7% year over year, predominantly driven by review usage. In discussing the remainder of the income statement, please note that unless otherwise specified, all references to our gross margin, operating expenses, and net loss are on a non-GAAP basis. Adjusted EBITDA is also a non-GAAP financial measure. Our gross margin in Q3 was 74%. As we mentioned before, our gross margins fluctuate from period to period based on the nature of our customer's usage, for example, the amount and types of data ingested and managed on our platform. Sales and marketing expense for Q3 was 13.8 million, or 38% of revenue, compared to 44% of revenue in Q3 of the prior year. The year-over-year decline is predominantly driven by a combination of lower total headcount and redistribution of our investment within sales and marketing. Research and development expense for Q3 was 11.1 million, or 31% of revenue, compared to 29% of revenue in Q3 of the prior year. The increase was driven by both domestic and international headcount. General and administrative expense in Q3 was $7.7 million, or 21% of revenue, compared to 19% of revenue in Q3 of the prior year. Leadership changes in Q3 2023 reduced G&A expenses in that quarter. Operating loss in Q3 was $5.6 million, representing an operating margin of negative 15% compared to negative 17% in Q3 of the prior year. Adjusted EBITDA was negative 4.5 million in Q3, representing an adjusted EBITDA margin of negative 12% compared to an adjusted EBITDA margin of negative 13% in Q3 of the prior year. Net loss in Q3 was 3.9 million or negative 11% of revenue in line with Q3 of the prior year. Net loss per share for Q3 was $0.06, in line with Q3 of the prior year. Turning to the balance sheet and cash flow statement, we ended Q3 with $126.8 million in cash, cash equivalents, and short-term investments, and no debt. Operating cash flow for the first three quarters of 2024 was negative $10.8 million compared to negative $28.7 million in the same period of the year prior. Turning to the outlook, For Q4 2024, we are providing total revenue guidance in the range of $35.2 million to $37.2 million and software revenue guidance in the range of $30 million to $31 million. We expect adjusted EBITDA to be in the range of negative $7.6 million to negative $5.6 million. For fiscal year 2024, we anticipate total revenue guidance in the range of $143 million to $145 million. and software revenue guidance in the range of $119.4 million to $120.4 million. We expect adjusted EBITDA to be in the range of negative $22 million to negative $20 million. Now, I'd like to turn the call over to the operator to open up the line for Q&A. Operator?

At this time, I'd like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Our first question comes from the line of Koji Akita with Bank of America. Your line is open.