CS Disco, Inc.

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, again press star one. I would now like to hand the conference over to your first speaker today, Head of Investor Relations, Alexey Lokhchikov. 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 fiscal year 2025. With me on today's call are Eric Fredrickson, DISCO's Chief Executive Officer, and Michael Affair, 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 opportunity, market position, product and go-to-market strategies, and growth opportunities, and the benefits of our product offerings 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 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 31st, 2024, filed with the SEC on February 20th, 2025, and the company's upcoming quarterly report on Form 10-Q for the quarter ended March 31st, 2025. 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 their closest GAAP equivalent is available in our earnings release. And with that, I'd like to turn the call over to Eric.

Good afternoon, everyone. I am pleased to report our first quarter of fiscal 2025 results, and I'm encouraged by the progress and the traction that we're seeing across the business. Software revenue in Q1 was $30.9 million, and total revenue in Q1 was $36.7 million, towards the high end of the guidance range. Adjusted EBITDA for Q1 was negative $5.1 million, or negative 14%, approximately $1 million above the high end of our guidance range. We finished the quarter with $118.8 million of cash and short-term investments and no debt. We ended Q1 with 318 customers who each contributed more than $100,000 in total revenue over the last 12 months, up 8% year over year. We continue to see year over year growth in the number of customers spending more than $100,000 with us, as well as the total revenue generated from these customers. In all, these customers represent 76% of our revenue. We saw yet another quarter of growth in the revenue from large multi-terabyte matters. We believe this is a meaningful signal for us for a few reasons. First, it's an indicator for future revenue. as large matters typically remain on the platform for longer. Second, matters tend to expand over subsequent months, which supports further revenue expansion. And third, it reflects the go-to-market changes that we have made that are driving the right interactions with the right customers, resulting in more strategic matters, higher average data per matter, and increased overall usage of our platform. While it's too soon to call this a trend, we are encouraged by these signals and optimistic that momentum will build in the quarters ahead. We continue to focus on the things we can control, including how we engage customers, and we are seeing early signs that our more focused, strategic approach is starting to pay off. First, I'm going to highlight our focus on client services changes in our go-to-market function in additions to our product suite. This quarter, we launched our new customer value proposition, With You in Every Case. With You in Every Case captures the essence of how Disco is shaping the future of litigation. Our industry-leading platform equips legal teams with tools not previously available to the legal world. And when paired with our expert services team, We're enabling customers to tackle the most complex, high-stake matters with confidence. To be clear, we've always had a strong combination of software and services, but we haven't always been great at communicating our full value proposition to our customers. We are changing that. The essences behind With You In Every Case are embedded in our marketing, sales, products, and operations ensuring that our customers understand the full value of what DISCO can offer them. We want customers to view DISCO not just as a vendor, but as a true partner who is scalable, reliable, and deeply attuned to the demands of every case. One great example of this partnership is the law firm Munch Heart. In Q1, Munch renewed a three-year subscription doubling their commitment compared to their prior contract. They've been with us for years and have consistently expanded both the number of matters and the volume of data they manage on the Disco platform. This is exactly the kind of outcome that we're striving for through with you in every case. We earned their trust through the strength of our technology, and we've kept it through close collaboration, deep listening, and a relentless focus on delivering value at every stage in their journey. This renewal is the result of strong collaboration between our customer success and sales teams, working alongside product and engineering to align on their evolving needs. It is a powerful example of how we combine our platform and our people to serve as a true partner in every case, and why we're confident in our ability to drive long-term durable customer relationships. Moving to the overall progress we are making within our go-to-market, last quarter we discussed our initiatives to enhance talent, to target accounts, and to align incentives. We made significant progress with each of these initiatives, and the increase in revenue from larger customers and larger matters is a positive indicator that those efforts are beginning to take effect. We are also seeing nice growth in our Cecilia generative AI suite, including Cecilia Q&A and Cecilia Auto Review. The number of our Cecilia Q&A customers grew five times from Q1 2024. We are happy with this trajectory and this capability as more customers are leveraging Cecilia Q&A to drive superior outcomes for their customers. With Auto Review, we continue to see strong momentum as well. In Q2 of 2024, we announced that Cecilia Auto Review was demonstrating speeds of 3,800 documents per hour over a 24-hour period, which is equivalent to a 140-person review team. Since then, we've continued to make big strides on even faster throughput and higher quality results that are potentially game changing for our industry. Excitement was especially clear at Legal Week in March, where I repeatedly heard how Cecilia and our broader e-discovery capabilities are ahead of the competition. One standout example is a leading MLAW 50 firm. In a government investigation involving close to 3 million documents, this client leveraged Cecilia's Q&A and auto-review capabilities to identify key facts and documents well ahead of critical deadlines, enabling them to craft the optimal strategy for their client. Working in close partnership with Disco, They used Cecilia to conduct a first-level responsiveness review and submit a production. The result was fantastic, a 97% recall and 71% precision across nearly 200,000 documents, well within the accepted industry standards, and they delivered at unprecedented speed. It's compelling proof of how our AI and services can elevate legal outcomes. Although Cecilia Auto Review revenue is still a small portion of our total revenue, we are optimistic about the future of this product. I continue to hear from our customers how they love our platform. Specifically, I've been hearing very positive feedback on the power of our AI and core search functionality, the speed of our systems, the intuitive user interface, the security, and the rate with which we are releasing high-performing new capabilities. Our customers' passion for Disco's platform and the continued execution from the Disco team gives me incredible optimism for the future. We are continuing to release capabilities that make life easier for our customers, enhancing both core eDiscovery and Cecilia-related workflows. Recent launches include Cecilia Definitions, which enables users to generate on-demand definitions for selected text, accelerating comprehension and analysis. enhanced Cecilia document scoping, improved document navigation, and expanded support for Slack and Apple documents and images, along with many others. These enhancements are not just about convenience. We believe they are important to driving more large and complex matters to our platform. We are building tools legal professionals can rely on to handle the most demanding cases with speed and precision. Importantly, many of these innovations were directly informed by customer feedback. They reflect our continued commitment to both industry-leading innovation and to solving real-world challenges for our users, ultimately helping to deepen customer trust and increase wallet share. From a macro perspective, we have seen some external volatility over the past few months. The US government administration's global tariff announcements sparked financial market instability, and its recent executive orders targeting specific law firms have raised concerns in the legal industry. I want to touch on these topics. First, regarding the recent legal industry conflict with the current administration, we stand firmly behind our customers and remain steady to support them however they need, when they need. Based on our review, we currently believe we have negligible exposure from these events. Second, In the context of broader macroeconomic concerns, we believe DISCO is well positioned to weather a potential economic downturn. Our industry is unique in that it can experience both headwinds and tailwinds during times of uncertainty. Historically, economic slowdowns have led to increases in litigation across several key areas where we have strengths, including bankruptcy, securities litigation, contract enforcement, insurance coverage, and regulatory investigations. While we believe we're in a strong position today, the strategic initiatives that we are driving with our existing customers to ensure that they are working with us on their large matters inherently helps us mitigate downturn risk even further. While the exact impact of the potential recession is uncertain, we remain optimistic that Disco's platform, which is designed to reduce costs, increase efficiency, and drive better outcomes, will continue to deliver strong value to our customers when it matters most. In summary, we're pleased with the progress we made in Q1. From continued revenue growth and improving customer engagement to continued innovation across our platform and AI capabilities, I'm excited for the rest of 2025 and beyond. I want to thank our customers, partners, and Disco employees for their continued trust and dedication. With that, I'll turn it over to Michael to walk through our financials in more detail.

Michael? Thank you, Eric. In Q1 2025, total revenues were $36.7 million, up 3% year-over-year. Software revenues were $30.9 million, up 3% year-over-year. Services revenues, which include DISCO managed review and professional services, were $5.8 million, up 2% year-over-year. 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 Q1 was 75%. 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 Q1 was $13.2 million, or 36% of revenue compared to 41% of revenue in Q1 of the prior year. The year-over-year decline is predominantly due to headcount changes. Research and development expense for Q1 was $12.2 million or 33% of revenue compared to 28% of revenue in Q1 of the prior year. This increase was primarily driven by an increase in research and development personnel. General and administrative expense in Q1 was $8.4 million for 23% of revenue compared to 25% of revenue in Q1 of the prior year. General and administrative expenses were relatively flagged over the year. Operating loss in Q1 was $6.2 million, representing an operating margin of negative 17% compared to negative 18% in Q1 of the prior year. Adjusted EBITDA was negative $5.1 million in Q1 representing an adjusted EBITDA margin of negative 14% compared to an adjusted EBITDA margin of negative 15% in Q1 of the prior year. Net loss in Q1 was 4.9 million or negative 14% of revenue compared to a net loss of 4.7 million or negative 13% of revenue in Q1 of the prior year. Net loss per share for Q1 was 8 cents flat compared to Q1 of the prior year. Turning to the balance sheet and cash flow statement, we ended Q1 with $118.8 million in cash in short-term investments and no debt. Operating cash flow in Q1 was negative $10.5 million compared to negative $7.3 million in Q1 of the prior year. Turning to the outlook for Q2 2025, We are providing total revenue guidance in the range of 36.5 million to 38.5 million and software revenue guidance in the range of 31.25 million to 32.25 million. We expect adjusted EBITDA to be in the range of negative 5.5 million to negative 3.5 million. For fiscal year 2025, we are providing total revenue guidance in the range of 146 million $258 million, and software revenue guidance in the range of $125.5 million to $131.5 million. We expect Adjusted EBITDA to be in the range of negative $18 million to negative $15 million. This represents an increase in our fiscal year 2025 software revenue, total revenue, and Adjusted EBITDA outlook from what we guided last quarter. Now I'd like to turn the call over to the operator to open up the line for Q&A. Operator?

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one in your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. And your first question comes from a line of David Hines from Canaccord Genuity. Your line is open.

Hey, thank you, guys. So, Eric, it's been a little over a year since you took the reins as CEO at Disco. I can appreciate the first, you know, 12 to 18 months or about getting internal ops where you want them. You know, obviously a lot of time has been spent on better aligning the go-to-market motion towards, you know, those higher value accounts that you referenced. What's the plan for the next 12 to 18 months? What are you focused on to drive faster growth in the business?

Yeah. Thanks, David. Um, it's been a year. I just celebrated my one year anniversary last week and I got to tell you, it's just flown by. Um, You know, when I came to Disco, I had a thesis that there was a tremendous opportunity for us to accelerate our growth and to get to sustainable profitability. It started based on the fact that I knew we had a great set of products, a set of raving fan customers, and a really passionate and talented employee base. But it also was clear that there were some problems that we needed to tackle. And these were problems that I felt like I could really help with because I tackled them in the past. That was enhancing our culture, improving our operational effectiveness, and revamping our go-to-market. And so we've made incredible strides so far. We've got the best employee engagement scores in the history of the company. We initiated really fundamental changes to how we measure and operate the business. And we rolled out critical changes to our go-to-market, as you mentioned, aligning the majority of our resources to our best accounts, getting them to focus on increasing our wallet share within those accounts, building out our customer success teams, realigning the roles for our salespeople and our customer success people, and changing the comp plan for our salespeople to really incentivize them to sell so that we could have a much more deliberate approach to helping our customers with those strategic and larger matters. And we started to see the green shoots from that, as we mentioned some of them in our prepared remarks. But the reality is we're just getting started. Most of the things that I mentioned that we have implemented, either we implemented a couple of quarters ago or many of them we implemented in January of this year. And right now it's about executing on our strategy. I'm confident that we've got incredible opportunity because we've got the right strategy. We're all aligned on that strategy. We've got fantastic people, great products, and we've got people who could see the future and they want to be part of it. And so right now it's about execution. We need to stay on point. We have hard work ahead of us, but we need to stay on point. We need to stay focused and we have to execute at a high level on the strategy that we've already initiated. So I'm more excited about year two than about year one, but year one's been great.

Good. Okay. And then I want to ask about the new tagline, right? I mean, you know, sometimes these things are marketing collateral, but the, you know, the with you in every case, right. And the promotion of full disco capabilities, it was unclear to me, like, is that a nod towards wrapping more services around the software or what exactly are you trying to accomplish with that kind of positioning of the business?

Yeah, you know, when I, I think you probably know I've met with, oh gosh, it's almost close to a hundred customers now face to face over the last year. And it's, it's remarkable how consistent I heard from them that they love our products. And when they would start digging in with them, with the types of matters that they use our products for, um, in some of the cases they use our, our products for all of their matters. But in other cases, they really think of Disco as a self-service solution. We're so easy to use. We're so fast. Attorneys can get in and use the system themselves. But for some of their larger, more strategic matters, the attorneys aren't going to get in the system every single day. They're going to lean on either their internal e-discovery teams, or they're going to lean on services to help them, whether it's ingesting their data or managing the project throughout. And so, you know, a strength of ours is the fact that we're so easy to use, we're fast, we can be self-service. But sometimes they want more than that. And we've got great services. We always have, or we at least have for the last few years, but we haven't always promoted them. And so what we need to make sure our customers know is that we're with them in every case. If they have a matter that is self-service, they want to use this self-service, that's fine. If they've got a large matter where they want our help, we can absolutely help them with that. In many of those cases, they're going to leverage our services to help them, let's say, ingest the data or manage the case. But an attorney could wake up in the middle of the night and have a theory about a case that they want to test. And they can go directly into DISCO themselves. And in natural language... Use Cisco, use Cecilia Q&A to ask a natural language question to test the theory behind their case. And so really what we're trying to get through with the customer value proposition of with you in every case is that we've got the best of both worlds. We've got an integrated solution with services and product together that can help them in any case, no matter how complex it is.

Yeah, yeah, makes sense. Well, thank you for the color. Nice to see full year estimates moving higher off of Q1. I don't think we've seen that in a couple of years. So good luck. Thank you.

Yeah, appreciate it, David.

Thank you. Your next question comes from a line of Mark Chappelle from Loop Capital Markets. Your line is open.

Hi, thank you for taking my question. Eric, question for you. I appreciate your commentary. um on what you're seeing in the broader macro environment and in your prepared remarks you mentioned that disco is is well prepared to weather an economic downturn um could you just provide some additional details on maybe some of the expense levers that you could employ or bring to bear to reduce operating losses if we do dip into an economic slowdown sure i'll get started and michael you can feel free to jump in here as well i mean the first thing i would say regarding the economic you know a potential economic downturn here um

You know, historically, litigation has done pretty well in economic downturns. In fact, there could be some headwinds, but oftentimes there's also tailwinds that help increase the amount of litigation. So, you know, there's potential this could create some additional opportunity for us. Now, you know, while we don't think we have too much risk there, we obviously are always looking at our business and making sure that we're doing everything we can to mitigate against that risk. Fortunately, the strategy that we have to work with our clients on their most critical matters, the ones that also happen to be larger, we can tailor to ensure that we're working on the matters that are less potentially impacted by a negative economy. And so from a revenue standpoint, we continue to make sure that we're focused on our strategy around going after the most strategic, largest matters in the correct practice areas. From a cost perspective, Look, I think, I think the way to think about it is, you know, and I've, I've, I said last quarter that we, uh, intend to be even, uh, adjusted, even a break, even in Q4 of 2026. Uh, and that still continues to be the case. We, uh, You know, we're making investments right now to ensure that we're taking advantage of the opportunity ahead of us. This, this is a big market. It's a growing market. I think Disco over time has the opportunity to be a 20% plus grower. But there's certain things that we need to do in this business that are fundamental. I mentioned some of them already. We needed to create a sales enablement program. We had no sales enablement people. We needed to create a new customer success team because we had a very, very small customer success team so that we could free up our sales people to actually go sell and grow the business. We have a quote to cash project that we have to complete to help grease the skids and make us much more efficient. And we've rolled out a very targeted account-based marketing approach. So some of those things require investment, and that's investment that we're making right now. You know, if we thought it was appropriate for us to reduce costs or to be able to, you know, to be able to generate more EBITDA sooner, it's possible that we could do that. I just want to make sure that we do that in a way that's responsible, then make sure that we're not missing out on the real opportunity ahead of us, which is to accelerate our growth and to not just get to profitability, but to get to sustainable profitability.

Great, thanks. And then as a follow-up, with respect to your rebuilt go-to-market engine, I was wondering if you could just comment a little bit on how new customers generally come to Disco. Is it through in-person meetings or events, or is digital marketing playing a bigger role?

Yeah, so new customer acquisition comes in a variety of different ways. You know, right now, the vast majority of our marketing is shifted to more of an account-based marketing approach. It's a combination of events. There is some digital aspect to it. There's a lot of thought leadership associated with it. There's certainly regional activities that we do that tend to be around thought leadership. There's certain events that we go to like legal week. um in new york in march we were we're actually much many of our teams at clock this week which is the legal operations conference um and then there's digital things that we do as well and we have we have a uh we have a sales development team uh as well but as you know the vast majority of our focus right now is not on just acquiring new customers it's expanding the relationship with our existing customers so you know we've got uh many customers that spend a hundred thousand dollars plus with us or even a million dollars plus with us and we only have in some cases 10 to 15 percent of their wallet share and so by doubling down on those customers to make sure we're working on their larger and more strategic matters it gives us the opportunity to grow that wallet share pretty significantly and so we're still acquiring customers we're making sure that acquires customers that we're acquiring fit within our ideal customer profile so we're putting energy there but we've put a lot of resources towards expanding our opportunity within our existing customer base. Great, thank you. You bet, Mark.

And again, if you would like to ask a question, please press star 1 on your telephone keypad now. We'll pause for just a moment. And there are no further questions at this time. I will now turn the call back over to CEO Eric Friedrichson for closing remarks.

Thank you. And thanks everyone for joining us today. You know, the Disco team is making really good progress and I'm excited about where we're trending. I'm excited that we're able to increase our full year guidance this quarter. I'm incredibly proud of my amazing Disco teammates and I'm optimistic that that the initiatives that we're undertaking right now will be a long-term driver for our performance. Being a more customer-focused organization, improving sales execution, and driving product innovation will be key to drive shareholder value. We're excited about what we've accomplished and even more excited