CS Disco, Inc.

Ladies and gentlemen, thank you for standing by and welcome to CS Disco's third quarter of fiscal year 2026 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 star one again. I would now like to hand the conference over to your first speaker today, Bill Roberts with Disco Investor Relations. Please go ahead.

Good morning, and thank you for joining us on today's conference call to discuss the financial results for Disco's third quarter of fiscal year 2026. With me on today's call are Eric Friedrichsen, Disco's Chief Executive Officer, Aaron Barfoot, Disco's Chief Financial Officer, and Richard Crum, Disco's Chief Product Technology and Strategy 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 entitled Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2025, and the company's upcoming quarterly report on Form 10-Q for the quarter ended September 30, 2026. 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 their closest GAAP equivalent is available in our earnings release. And with that, I'd like to turn the call over to Eric.

Thanks, Bill. Good morning, everyone, and thank you for joining us. I just passed my two and a half year anniversary at Disco, and it's been a period of historic change for the legal industry. Just over the past few quarters, we've seen the legal industry go from a technology laggard to one that's rapidly being transformed by AI. Disco's been an innovator in this space, and we're primed to capitalize on the large and growing appetite among law firms and corporations for the best legal AI capabilities. and we're doing so by forging our own path. While many legal tech companies are trying to be everything for everyone, Disco is hyper-focused on being the AI for litigators. We believe that we are uniquely positioned to win this category thanks to our long-held advantages in data and evidence through our core eDiscovery product and our latest innovations in building a unified AI solution tailored for the demands of modern litigation. In short, the legal world is rapidly evolving and Disco is helping drive that change. Before I dive into the quarter, I am incredibly excited to welcome Mitch Raison as Disco's new Chief Technology Officer and Johann Reed as Disco's new Chief Marketing Officer. As you saw from our press release this morning, their impressive resumes speak for themselves. Both Mitch and Johan are established leaders who are deeply experienced in growing and running large businesses in highly competitive industries. Given the high aspirations we have for Disco, that perspective and experience will be enormously helpful. As we're building AI for litigators, I am thrilled that mission resonated so strongly with both Mitch and Johan. Now, Let's dive into some more detail. Disco delivered a strong third quarter. We won more of the large and complex matters that sit at the center of our strategy. We grew with our largest customers, and we saw AI become a bigger part of how litigators run their matters on Disco every day. In Q3, total revenue was $45.3 million, up 15% year over year. Software revenue was $38.6 million, up 13% year over year. And services revenue was $6.7 million, up 21% year over year. All of these are adjusted for the contingent matter that we previously reported in Q3 of 2025. Adjusted EBITDA was $79,000. We reached positive adjusted EBITDA one quarter ahead of the Q4 target and we expect to be adjusted EBITDA positive in Q4. In Q3, we saw strong performance in the three areas that matter most to our near and medium-term growth. First, continued growth in large matters. Second, expanding wallet share with our largest customers. And third, accelerating usage of AI across our platform. Let's start with large matters because they remain the thread that connects our strategy. We saw another quarter of strong double-digit growth in the number of large matters, which is an important focus because they generate more revenue, they expand as the case develops, and they stay on our platform longer. In short, large matters are worth significantly more to Disco over time. They are also where Disco delivers the most value to our customers. where our AI does its most valuable work and where our services teams continue to make the biggest difference. The rapid uptake of Disco Platform, our new commercial model, has become a powerful engine to help drive large matters to Disco. The number of large matters on Disco Platform tripled over the course of Q3. Customers tell us that the inclusion of AI on every matter and the straightforward pricing make it easier to bring their biggest cases to Disco. More importantly, Disco Platform is changing the way these firms approach their matters. Much Shellest is a well-regarded, full-service business law firm that is a longtime Disco customer. They recently moved to the Disco Platform on an enterprise contract and put it to work on their largest construction matter, where Cecilia AI has proven immediately useful compared to the general AI legal tools that they tried to use. The manager of eDiscovery noted, I anticipate Cecilia AI will really transform how we work the more we use it, especially on our larger matters. Larger matters are also where services and software work hand in hand. The biggest, most complex cases demand nuanced forensic collection, dedicated project management, and review expertise. And our global team of experts deliver all of it alongside the platform. Our services are important to our customer success, particularly on large matters where the additional resources and expertise make a difference on complex cases and are an accelerant to our software growth. Services helps us win larger matters and onboard them faster. which is reflected by our service performance this quarter. Services interwoven with our software is the core of our with you in every case value proposition. Software and services that evolve alongside the customer and the case and continually add value across the life of the matter. Alongside large matters, we also made significant progress with large customers. The largest, most sophisticated firms and corporations not only have more large matters, they have consistent litigation needs and frequent spending. So we believe growing this segment gives us a more efficient path to a predictable and durable revenue base. The number of customers generating more than $100,000 over the last 12 months grew to 374, up from 326 a year ago and 354 just last quarter. These customers represent $133 million, or 78% of our last 12 months of total revenue. We were also very pleased with the continued growth in AI usage across our platform. Revenue attributable to generative and agentic AI capabilities grew over 200% year over year, and engagement is deepening. Cecilia AI prompts increased approximately 40% during Q3, and the number of customers using Cecilia on multiple matters more than doubled. Advanced research is another success story. As a reminder, advanced research is our next generation agentic tool that automates deep, complex interrogations of the facts to produce litigation quality work product at scale. This new feature is delivering measurable returns for our customers. A partner at Kutak Rock, an AMLA 200 litigation leader, called Advanced Research his best associate and noted it stands out among legal AI solutions for the value it adds. He said that, now that AI is everywhere, ROI is what matters. We need solutions that are scalable and drive meaningful improvements and how we prepare and take a case to trial. Advanced research has been a force multiplier on complex matters by handling difficult tasks across huge volumes of data to deliver real insights to our case teams. In Q3, we made advanced research generally available across our customer base. In that time, it has grown to account for 91% of all Cecilia Q&A usage. and our largest matters are seeing the most use. Additionally, auto review has also continued to gain momentum and we're seeing customers move from trying auto review to building it into how they work. One of our corporate customers recently directed all of its outside counsel teams to use auto review on every matter going forward, absent a compelling reason for an exception. That is a powerful signal of where e-discovery review is headed. We are also investing directly in adoption. This quarter, we launched our AI adoption program, which puts Disco litigation engineers on-site with customers to work hands-on with case teams on advanced research and auto review in their live matters. Alongside it, our Pathways training program continues to expand. At one leading international law firm, we trained more than 200 people, most of them attorneys, in a single quarter. The more competent litigators are with these tools, the more matters they bring to Disco. Repeat usage is central to our strategy. And as I mentioned previously, our customers are really feeling the value these tools bring to the litigation teams. In the near to midterm, we see AI-driven first-pass review becoming the default approach as the capabilities of this technology and overall readiness of the market continue to evolve. The quality of AI review has risen so dramatically that there is now more risk in human review. And the massive speed advantages mean that our customers see significantly more value for their dollar. Being able to review in 48 hours what it would take a team of 20 to do in two months and with higher quality completely resets the economics of eDiscovery review. This area of eDiscovery is forever changing. and we are building auto review to lead that shift. Speaking of where the world of litigation is going, I also want to speak a bit about our unified litigation solution, which we announced going into pilot with key customers last quarter. The unified litigation solution is an incredible opportunity for Disco to become the AI solution for litigators. While Richard will cover our progress in a bit, I want to share what we're learning from the litigators using it. The thing we hear most from our pilot customers, and these are some of the largest and most sophisticated firms in the world, is the need for purpose-built technology that can handle the speed and scale of modern litigation, manage their data natively and securely, and provide deep contextual insight into both the facts of a matter and the controlling law. One of our pilot customers, an AMLAW top 50 firm with multiple matters in the pilot program, has used our solution on a large medical matter after recognizing that general legal AI tools had too many limitations. Two things brought them to our unified solution. First, our ability to easily manage the size and the complexity of the matter, and second, the ability to apply our advanced AI capabilities to both the facts and the law within a single secure environment without relying on external data connectors or separate tools. All of this adds up to a very exciting story for Disco. I believe now more than ever that our core business alone can drive Disco to be a 20% plus grower. Our core business is accelerating with larger matters larger customers and deeper AI usage. Our unified litigation solution offers enormous upside on top of that momentum as we broaden our capabilities to become AI for litigators and to serve even more needs for litigators across the full litigation lifecycle. With that, I'll turn it over to Richard to dive into some impressive product updates.