Q2 2021 CS Disco Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the C. S disco second quarter of fiscal year 2021 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 speakers' 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 one on your touch don't keep Pat if for any reason you would like to repeat a question. Please press the pound key I would like to now hand, the conference over to your first speaker today April seat with C. S Cisco Investor Relations.

Please go ahead.

Ms <unk> the floor is yours.

Afternoon, and thank you for joining us on today's conference call to discuss the financial results for just go second quarter fiscal year 2021 with me on today's call are Kiwi camera, just goes co founder and CEO and Michael look there just goes chief financial Officer.

During today's call, we will review our financial results for the second quarter fiscal 2021 and discuss our guidance for the third quarter and full year fiscal 2021 today.

Today's call will include forward looking statements pursuant to the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995, including but not limited to statements regarding our financial outlook, including our guidance for the third quarter and full year of 2021, our market opportunity market position and growth opportunities. In addition to our prepared.

Remarks, our earnings press release, SEC filings and a replay of today's call can be found on our IR website at IR Dot C. S. Disco dot 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.

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 in the company's prospectus filed with the SEC pursuant to rule 424 be on July 22nd 2021.

All information will be made available in the company's quarterly report on Form 10-Q for the quarter ended June 30th 'twenty 'twenty. One. 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 a reconciliation 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 Kiwi.

Thanks April good afternoon, and welcome to our first earnings call as a public company.

I am incredibly excited to be speaking with all of you and introducing disco did those of you aren't familiar with us.

I will spend some time discussing our company our market and our strategy, but first I wanted to point out a few financial highlights we.

We had an excellent Q2 with revenue of $34.0 million or.

88% year over year, driven both by strong usage across our customer base and an increase in new customers.

With this rapid growth, we continue to demonstrate operational efficiency with Q2, adjusted EBITDA margins of negative 5% compared to negative 28% in Q2 of the prior year up over 2200 basis points.

For those of you new to get scale I would like to provide a little bit of background on what we are working to achieve before launching disco in 2013, My partners and I were building a corporate litigation practice in Houston, Texas as a lawyer I was struck by how antiquated the entire legal process Walsh.

If you walk the halls of legal departments are law firms you will notice that the vast majority of time is spent on tasks that did not require any human legal judgment and so the idea was born to create a modern AI powered solution that would allow lawyers to automate away the parts of the practices that don't require.

The nickel judgment.

If you look at any company's P&L, regardless of industry. They all invest in core operational functions engineering marketing sales HR finance and legal.

Almost all of these functions of corresponding software companies the powerful but that is not true for legal.

Our goal is to become a software company that powers the work of legal departments.

Today in every major legal matter corporations have to go through large collections of enterprise data to figure out what really happened and to find the evidence to prove it. So they can comply with the regulatory requirements and achieve optimal legal outcomes.

This is the problem that our solution solves think about the massive amounts of data created every day.

DFS word documents excel spreadsheets and emails instant messages from video with voice recordings to name a few.

Lawyers have to be able to extract only the most relevant information from the mountain of data.

GAAP exists between that raw data of the work lawyers need to do such as producing documents for regulators and executing our litigation strategy.

Before disco that GAAP was bridged by an expensive complicated opaque and secure Seth.

On premise point solutions and professional service vendors, we are disrupting the status quo.

We have built a software system of record that allows for handling enterprise data legal matters. This solution has three basic parts.

The first is a data lifecycle engine that allows the legal industry participants to collect enterprise data from all enterprise systems of record process and enrich that data and storage through the life of multiple legal matters. The.

The second is a review platform that allows lawyers to organize the work of conducting legal document review to determine what the facts are.

And the third let's lawyers take legal action for example by producing relevant data to regulators and compliant with discovery obligations.

We have built three products on this platform.

First is E discovery, which is both the system of record for enterprise data used in legal matters and a system of engagement, where legal professionals engage all of the work related to reviewing organizing and producing documents.

Second this disco review, where we use AI to automate the process of legal document review.

And third is this showcase filter, which is the system of record and engagement for all non document evidence. This is a way for lawyers to prepare an organized witness statements deposition testimony and transcript support hearings among other things.

Together these products enable lawyers to focus on practicing law and providing the best outcomes for their clients not dealing with enterprise data.

Today, our solution manages the document discovery process for mission critical and well known legal matters and for some of the largest corporations of law firms in the world.

Our customers find tremendous value in our solution.

A great example of what has driven the acceleration in growth. This quarter is a well known consumer brands that in Q4 of last year hired a new Deputy General counsel from a major technology company that had been a longstanding <unk> customer.

He ran the sole source procurements for Ediscovery when he started his new job and between the fourth quarter of 2020, and the first quarter of 2021, his new company migrated their E discovery program to disco E discovery.

That in the second quarter of 2021. This company experienced a series of major legal issues that caused them to accelerate their adoption of our second product <unk> review.

So with three quarters, we saw this company ramp from zero to a multimillion dollar level of spend.

That journey has historically taken our customers several years there.

This is a great example of the impact that lawyer mobility can have on our business lawyers, who have been through the disco adoption journey at one company can accelerate <unk> adoption in their new company.

Another example of rapid adoption is a leading global travel company that joined our solution in Q2 and grew to be a $1 billion plus customer in the quarter.

We are a key partner for these customers are mission critical solution and we are proud to help them through some of their most difficult moments.

We are attracting a large and growing market. According to statistics total spend on legal services is expected to be $767 billion in 2021.

Ediscovery market is about $50 billion. According to IDC by our internal bottom up calculation. We believe the total addressable market for our solution is $42 billion. Overall, we believe the growth of regulation around the world global operational complexity and.

Price data growth as well as the rise of a new generation of legal professionals are all driving the demand for modern AI powered solutions to help with these challenges in a scalable and sustainable way.

As a company disco combines world class engineering with a deep understanding of the law and how lawyers work and think.

In order to build product experiences that felt magical two lawyers, we prioritize legal workflow and intuitive user interface and everything we create.

Rapid growth to date demonstrates how our product vision resonates with customers. We are very early in our growth cycle in a very large market.

Our priorities are to win new customers expand <unk> usage within existing customers and expand the adoption of disco review a district case builder.

To close it off our IPO of this first earnings call are only the beginning for disco, although we already have a category defining solution. We believe our work has just begun to develop technologies that strengthens the rule of law.

Now I will turn it over to Michael to go through our financial results.

Thank you Kiwi before I discuss the results and guidance I would like to spend some time discussing our unique powerful business model.

We generate substantially all of our revenue from our customers usage of our solution.

Our revenues are based on our customers' actual usage of our solution and our customer usage can fluctuate based on the number and nature of legal matters. They have at any particular time.

We make it incredibly easy for customers to get started with Cisco with a simple contract without long term commitment are simple and transparent pricing model allows customers to easily adopt our solution and scale their usage.

In most cases customers do not know the amount of usage needed at the time. They initially contract with us because they generally do not know how many documents will need to be reviewed in a legal matter until later in the legal process.

We don't know if the customers monthly based on their current usage because of this dynamic we do not focus on traditional SaaS metrics like billings or remaining performance obligations, but rather we focus our attention on total revenue growth.

Now, let's discuss our results and guidance as Kiwi mentioned Q2 revenue was $34.0 million up 88% year over year.

Strong performance across the board, including continued adoption and expansion of disco E discovery and accelerated adoption of disco review.

In discussing the remainder of the income statement. Please note that unless otherwise noted.

All references to our expenses operating results and share count are on a non-GAAP basis. Our total gross margin was 71% consistent with 71% in Q2 of the prior year.

And marketing expense was $16.0 million or 36% of revenue compared to 45% of revenue in Q2 of the prior year, while down year over year on a percentage of revenue basis on a dollar basis. This is actually an increase of over $8.0 million as we continue to scale our go to market organization.

Research and development expense was $13.0 million or 26% of revenue compared to 38% of revenue in Q2 of the prior year.

General and administrative expense was $11.0 million or 16% of revenue compared to 19% of revenue in Q2 of the prior year.

Operating loss was $2 million, representing a margin of negative 7% compared to negative 31% in Q2 of the prior year.

Adjusted EBITDA was negative $7.0 million in Q2, our margin of negative 5% compared to a margin of negative 28% of the prior year, the operating margin and EBITDA margin leverage. We demonstrated was the result of both strong revenue performance.

And operating expense dynamics of the prior year quarter in which we undertook operational efficiency initiatives in response to the COVID-19 pandemic.

Net loss was $3.0 million versus $5 million in the prior year net loss per share was <unk> 16 versus loss per share of <unk> 38.

In the prior year.

I will now turn to the balance sheet and cash flow statement.

We ended Q2 with $47 million in cash and cash equivalents in July we raised $225.0 million proceeds in our IPO net of underwriting discounts and commissions.

Operating cash flow year to date was negative $12.0 million compared to negative $16.0 million a year ago.

Now turning to the outlook.

For Q3, we are providing revenue guidance in the range of $30.0 million and $34.0 million representing year over year growth between 43, and 45% as I mentioned previously we have a usage based business model. So there is inherent volatility from quarter to quarter as customers legal matters begin.

And expand and shrink and as activity in those matters increases and decreases usage of our different products.

We saw how this volatility that can create outsized growth in Q2, where we saw 88% year over year revenue growth.

You can see from our guidance you should not expect this level of outsized performance in every quarter.

We are providing adjusted EBITDA guidance in the range of negative $12.0 million and negative $13.0 million, representing an adjusted EBITDA margin of negative 42% at the midpoint, we do anticipate operational cost to grow over the next several quarters and next year as we continue to invest in our product and go.

The market team.

On a full year basis for fiscal year 'twenty. One we are guiding for revenue between $108.0 million and $107.0 million representing year over year growth between 103%.

We expect adjusted EBITDA between negative $24 million and $31.0 million.

In summary, we're hyper focused on transforming the legal industry and enabling legal professionals to provide better advice and outcomes for their clients. We're doing this by continuing to invest in cutting edge technologies to maintain our product leadership position and continuing to grow our business both in North America and <unk>.

Nationally we are quickly becoming a must use tool for legal departments around the world and we are confident that this momentum will continue I would like now to turn the call over to the operator to open up the line for Q&A operator.

Certainly we will now begin the Q&A session.

Like to ask a question. Please press star followed by one on your Touchtone keypad. If for any reason you would like to remove that question. Please press star followed by two again to ask a question Brett Star One as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.

We will pause here briefly to allow questions to generate income.

The first question is from Sterling Auty with J P. Morgan. Please proceed.

Yeah, Thanks, Hi, guys and welcome to the public markets, maybe just to get kicked off my first question would be about that large consumer customer that you mentioned and kind of your comments about the business model and the variability. It can generate what are some of the things that youre doing to drive increased <unk>.

Usage to try to let's say smooth out some of the volatility that you might see from a single customer quarter to quarter.

So each of our customers goes through and adoption journey that has historically taken several years and typically they will start out as a kind of mid to upper five figure customer grow to be a six figure customer and then great to be a seven figure customer at mature.

Over the course of their journey, there specific legal usage will fluctuate and that will cause fluctuations in the revenue received from a particular customer now as <unk> grows our overall revenue base the impact of any particular customers fluctuation and usage are over.

All revenue becomes smaller and smaller and so we would expect sterling that as our base grows.

More of these specific customer usage fluctuations washout.

In the aggregate in terms of what we're doing to drive expansion. This is obviously a huge focus for us what we're seeing in Q2 in general in the more recent quarters is that customers have taken this journey, which used to take multiple years and shorten that dramatically. So what we're seeing with that customer is a customer that.

From zero in Q4 of last year to multimillion dollars of revenue over three quarters and over the course of that journey has shifted their E discovery program to disco both in terms of adopting our disco you discovery product and then more recently discovery view. We think this is something thats Super promise.

Thing about the business.

As people through lawyer mobility switch companies they take their history of disco adoption with them and as a consequence, it accelerates that revenue growth curve for logos that we've been adding more recently.

That makes a lot of sense and then one follow up question. How would you characterize you had you had significantly increased your go to market resources, meaning sales head count how are those resources ramping relative to your expectations and versus what you've seen in the past.

Yeah. We're delighted so if you look at Q2, we really saw outperformance across every aspect of the business no matter how you slice. It. So we really started this SNF ran.

Ramp in Q3 of last year, when it became evident that the impact of Covid on our business was limited and so already in Q2, you will see some impact from those reps who are hired in Q3 Q4, and even Q1, we're seeing them perform.

Well in excess of the historical performance for reps in the relevant tenure bands, we're seeing some nice things in terms of win rates not just for new reps, but for all reps, we're seeing acceleration more recently and lead generation and how those leads are flowing through the funnel and we're seeing increased.

Performance from our customer success team.

One of their primary job is to help our clients identify opportunities where they would benefit from more disco products. So growing the relationship from for example, <unk> E discovery to begin with that and discover review at <unk> builder, which can have the impact of multiplying their spend with us. So overall we're.

Really pleased with how the ramp in our go to market investments is going.

We expect to continue stepping on the gas fair given the context, where we think we have the best solution in the market.

We're.

Overall tailwind from the market are going in our favor as the industry shifts from services to software and from on Prem to cloud. We think now is the time to really invest in growth.

That sounds good thank you.

Thank you Mr Auty.

The next question is from Cody Aikido with Bank of America. Please proceed.

Hey, Hey, Mike really really nice first quarter out of the gates here. Thank you for taking my questions.

For my first one now that you're public I guess half things have changed in terms of overall market awareness have you seen any meaningful change in maybe the volume of interactions or inbound between customers prospects and partners out there.

Yeah, we've been delighted Kochi, I think being public give us our larger customers confidence that <unk> is a company that has the resources and the longevity to partner with over the long term and what we're hearing from customers as everybody agrees that software is coming to legal.

That legal is going to be like every other business function, where software transforms the way the department works by enabling the automation of tasks that don't require human legal judgment. So that lawyers can focus on things that are more valuable and are the kinds of work. They went to law school to do and so when we engage with customers.

We're talking not only about our current offerings where of course, we think we have great things to talk about but we're also talking more generally about look if I'm a general counsel over the next three years or five years technology is going to be a much bigger part of the way I do might work the work of the legal department and I need a tech.

Knowledge company I can partner with to think about how we'll go through that journey together those kinds of conversations co chief I think we're really accelerated.

Not only are going public but this sets.

And increased confidence that <unk> can be a long term partner for our clients.

Also point out just recently we had.

It's one of the two big conferences in our space in Las Vegas, and it was in person limited attendance, but still in person and we were delighted by our ability to engage with many large existing customers large new customers I think to your point about increased inbound we were really delighted by the lead.

<unk>.

Traffic at our suite meetings out of our events, even at our booth on the conference floor with people, who are really interested in learning more about what we're up to.

Got it got it and then one question for Mike maybe I missed it but did you happen to give the total customer number for the net revenue retention rate.

Yes, so thanks Koji.

I appreciate the question. So we were really pleased with our customer growth in the quarter. Both in terms of total number of new customers as well as the expansion of our existing customers as you can see what the results. It was a very very very strong quarter.

All round.

Not disclosing the specific customer account number the DNR at this time, but we were really pleased with the growth overall.

Got it okay.

Thanks for that and just last question from me.

So in this quarter, clearly very very strong growth here, 88%, adding $12.0 million sequentially.

I guess there must have been a couple of big deals that came onto the platform with a lot of data. So how should we be thinking about the visibility of that revenue stream tied to that data I mean, I guess the data gets taken off at some point right. So how do we think about the visibility of that data when could have potentially come off then and how are your customer.

<unk> talking with your salespeople about about that data stream. So we can be prepared for that.

So I think if you look at Q2 that 88% year on year growth gives you a sense of just how good good can be when absolutely everything in our business firing on all cylinders. There was no particular driver of the outperformance in Q2, whether you look at.

New customers, whether you look at increased growth from existing customers, whether you looked at faster adoption journey use like the two examples we talked about in our.

Prepared remarks, whether you think about growth internationally or growth in the United States, whether you think about growth in the core disco E discovery product or increased adoption in disco review all of these things were really firing on all cylinders and there isn't a single driver.

Growth in Q2 in terms of how we have insight into our customers' data usage look we obviously internally.

<unk> deep bottoms up forecasting and sites, where our customer success teams and sales teams have deep relationships with our clients. We have telemetry that gives us insight into the legal matters going on into the platform and we use all of that to form a picture that gives us visibility and confidence in how the.

Legal needs and resulting data of our clients will change over time I think the other point is the point I made with Sterling, which is that as <unk> gets bigger and bigger as our customer base expands and as more of our customers become mature the impact of the fluctuation in data usage from any particular customer.

<unk> becomes a smaller and smaller part of our overall revenue base.

Got it thanks Kiwi appreciate it congrats on a great first quarter. Thank you so much.

Thanks, Patrick.

Thank you Mr Aikido.

Our next question is from Tyler Radke with Citigroup. Please proceed.

Hi, This is Brian Kim on for Tyler from Citi.

The second quarter revenue growth was incredibly strong and even if you take out that one large customer and I know that wasn't the only one but.

As you said it was firing on all its also under so wanted to better understand the overall demand trends.

I'll ask you to what extent did you benefit from pent up demand. After some delays that occurred during the pandemic whether that be from quite closures or delays in enterprise data collection.

And how do you see that kind of pent up demand if you saw any.

Pushing into the later half of this year.

It's interesting I think one thing we learned from Covid is that our solution really is mission critical to our clients and they actually have relatively limited control over the timing of legal events that drive usage in our platform. So if you look at the impact that Covid had.

We had one sequentially flat quarter last year, and then Q3 Q4, we saw rapid reacceleration.

And so I think when you look at Q2 of this year, it's not so much driven by pent up demand because customers really could not just hold their legal matters and then suddenly released them in Q2, but I think what we are seeing is something related to that which is COVID-19 demonstrated to legal.

<unk> that they absolutely needed a strategy to go to the cloud that they needed a way to get enterprise data into legal review, even when people are working remotely when the law firms that they are collaborating with our remote when people who had previously been involved have been involved in collecting data by end are remote.

And so on and so that's a tailwind right the shift from services based solutions that rely on in person services to a software based solution that doesn't depend on that and the shift from on premise solutions to cloud solutions. Those are tremendous tailwind that are driving clients to say look I know, we're going into the cloud.

Maybe before Covid, we were going to the cloud in three years or five years now we need to go to the cloud in six months, one year or two years.

So I think thats, where were seeing driver of demand coming out of Covid.

Great. Thank you and then I also wanted to ask about wallet share gain opportunities.

Your law firms that might have multiple E discovery solutions in place.

What did you see in the over the past quarter in terms of wallet share gains at firms with multiple solutions and what initiatives you have in place to drive that.

Especially considering that like on the law firm side, there their billing based on our scale.

What's really the incentive for law firms to increase their usage.

Inefficient solution from Tesco.

Okay.

So it's pretty rare for a law firm to pay us out of its own pocket. The way to think about law firms is that every time, we sell to our corporate legal department. That's the budget, we tap into that corporate legal department will be represented by one or more law firms and one of the things we've always focused on in disco is.

Bringing together this unique combination of world class engineering, coupled with a deep understanding of the wave lawyers work in sync to build product experiences to field magical to lawyers. So we sell our solution to the legal department, we don't charge for users as a consequence, the legal department will add lawyer.

From the law firms that represented as users and then those lawyers going to your question. We will have the side by side experience of using disco for that client and using competitive solutions for other clients and very very often the reaction. This lawyers have is wow I really prefer a disco and so.

What they do is they go tell their other clients about disco and they use examples from their first client about what impact adopting our technology can have on being more efficient in the handling of cases getting to actionable evidence more quickly.

Reducing the overall spend on legal document review and seller. This does two things for the lawyer at the law firm first it makes them look good they're going to their new client and telling them how they can handle legal matters much more efficiently and as a consequence it helps them win business in the hyper competitive market for legal service.

And second more selfishly it gets the lawyer to be able to work on the solution that they prefer working on which is <unk>. So that's how to think about law firms in our business. They sort of sit at the center of this nexus of talent in the legal industry, where we sell to our legal department. They add users from the law firm the users from the law.

<unk> love it and as a consequence, they introduce us to their next client and that client introduces us to other law firms and so on throughout the industry and now there are of course, many tens of thousands of companies out there that could be <unk> customers and in the United States. The largest law firms thats. The M 200, so even if you will.

Have relatively early penetration in terms of the number of corporate legal departments that are using disco you will wind up working with virtually all of the am law 200 law firms and we disclose the exact number in our filings.

That's why you will see more firms using multiple solutions because they have multiple clients as we grow the number of corporate relationships that we have that will translate into increasing share of use at the law firms.

Thank you so much.

Thank you. The next question is from DJ Hynes with Canaccord.

Please proceed.

Hey, Thanks, guys. Congrats on the good start here.

One for you I think during the IPO process, you talked about win rates that are actually higher against other cloud providers and they are versus the legal service providers that are typically leveraging legacy technology. It seems a bit counterintuitive. When you do that first and maybe you could just talk about why that's the case and how it influences your go to market strategy.

I think some of it is segmentation of the market. Our strategy has always been to go after.

Large enterprises and the law firms that represent them core handling some of the most important complex legal matters in the world.

And some of our cloud competitors I think have had other visions for the right way to approach the market I wouldn't want to speak for them, but I think their focus is sometimes done very specific niche as for example, plaintiffs law firms or kind of small internal investigations things of that nature.

And so if you look at our win rate data, obviously, we're selling into the big ticket kind of large enterprise for a large legal matters. When we see some of those other cloud companies. They may have a solution that is not as well suited to those kinds of use cases and that may translate.

Into higher win rates, taking a step back though D. J I think the overall trend we're seeing across our business is an acceleration in win rates period across every segment of the market and across all the different types of competitors. That's one of the things that no doubt contributed to our outsized performance in Q2.

And one of the things, that's really giving us growing confidence about accelerating our investment in go to market.

Yes makes perfect sense and that's helpful color.

Michael a follow up for you just in the Q3 guidance and I just want to be perfectly here clear here given.

A usage based model we're in the unique situation of kind of guiding in the third month of the quarter.

Is there anything youre seeing that suggests usage has materially slowed from Q2 levels or are you just being prudent given at your first quarter out post IPO.

Yes. It is.

Great to hear your voice.

So we we're trying to be prudent in our guidance and I'll also just remind US you know we're a usage base. So while we're two months into the quarter. There is still almost a month left and so that's where a usage based and as you probably know from reading the S. One and Youll see it in the Q roughly 88% of our business.

This is usage base, where the balance is subscription so we're trying to be prudent we feel really comfortable about our guidance.

And we wanted to be prudent as a first time out.

Yes that makes sense. Thank you guys and congrats.

Oh thank.

Thank you Mr High.

The next question is from Derrick Wood with Cowen <unk> Company. Please proceed.

Great. Thanks, and congrats on just a great quarter.

First one I guess Kiwi you mentioned one of your secular drivers as growth in the regulatory environment and just curious are there any specific verticals to call out that are facing.

Increased regulation of the litigation and perhaps you could talk about the opportunity within the banking and financial services market because that's traditionally a vertical that spends a lot on software.

Absolutely I think one of the trends that you see everywhere in the world is that we have a tendency to create more laws and more regulation every year and very little incentive to get rid of the old ones.

There is a great paper by saw left more from University of Chicago Law School that describes this is an addiction to la and of course, an addiction to launch terrific for discount so thats a secular trend right you get more and more regulation every year and the more regulation. There is the more that drives investigations and litigation.

<unk>.

And the more of that there is more usage there is of our platform.

And the.

The better it is in terms of revenue growth to give you. An example think about over the past few years, the dramatic increase in privacy regulation and also how the privacy regulation varies across different jurisdictions around the world think about California Privacy Act think about GDP.

And so on.

We saw tremendous growth in the European business, both in Q2 and more generally in the past few quarters and one of the drivers of that growth has been large corporations.

In the EU looking for a more efficient way to handle data subject access requests under GDP are so that's an example, a very concrete one of where regulatory change creates new categories of legal work that require the use of our solution and in particular require a way to deal with a large <unk>.

Volumes of requests targeting large volumes of enterprise data in a way that's automated leveraging <unk> AI with respect to financial services, obviously GDP or is <unk>.

The bulk of those companies and we've seen lots of adoption in that area more generally we actually see some of our large clients in that vertical think about using disco for ongoing compliance use cases. So it's not that there is a specific investigation or a specific piece of litigation.

But rather there is a desire to monitor the communications that are happening inside the business and with.

Partners competitors and so on in order to proactively identify legally problematic documents, so that the compliance or legal department can take appropriate steps before a formal legal issue comes up.

So that's one driver specific to that industry that we think will power growth.

That that's helpful. Thanks, and either T, where Michael but.

Can you remind us how aggressive you guys plan to be with hiring through the second half, particularly on the sales front.

I don't know if you'd throw out kind of.

Rough growth numbers in that you'd like to be in terms of exited the year with sales capacity versus year ago levels.

Yeah, we're not giving specific numbers, but I can tell you the DJ that based on what we're seeing not just in Q2, but also more recently our appetite for investing in go to market is going up not down.

We think big picture, we're very early in the overall growth curve of our business. We think we have the winning solution.

At a time when the overall industry is shifting in our direction right those shifts from services to software from on Prem to cloud and so we think now specifically over the next 12 to 18 months is the time to really invest in scaling out our go to market capacity.

Acquire share in this market.

Got it thanks for taking my questions.

Thank you Mr Wood.

The next question is from Scott Berg with Needham. Please proceed.

Hi, Kiwi Michael Congrats on the great start here I guess.

Two questions from me first of all one of the one of the questions that can perpetually get us on the evolution of cloud solutions in this market, while you touched on competitive cloud solutions earlier QE, how do you start thinking about where the cloud evolution is truly touched the E.

Your discovery and litigation markets today.

Okay.

Well I think there's a couple of things to talk about there one is the desire for remote work and collaboration.

Which has been very difficult to achieve with legacy solutions for a number of reasons. One is that the legacy solutions or services space and so they require people to do things like go physically into the enterprise and collect data.

And second is that the solutions are on Prem and so you would have these situations where people are actually shipping hard drives back and forth to teams of people doing manual data operations manual project management, and so on and so how does cloud change that kind of historical status quo.

One <unk>.

Enterprise data is moving to the cloud generally so when you have the cloud E. Discovery solution, you can collect that data, sometimes without the data ever leaving the cloud right. So it's a dramatically better way of hooking into enterprise data that gets rid of a lot of that human data collection work SEC.

Because it's an integrated cloud solution. It just naturally supports to remote work and collaboration.

Many companies and many law firms sent their people home and even those that have since come back legal is a highly network industry, where our legal department will be working with multiple law firms inevitably some of those people are still at home and they are also geographically dispersed more so after COVID-19 had been before Covid and <unk>.

Again, a cloud based solution mix all of those things better, but that's kind of the table Stakes. Let me talk to you a bit more about the kind of more profound technology shifts that the cloud is bringing about.

So if.

If you talk to customers and you asked about legacy solutions, you'll be surprised to hear that actually performance still remains a huge pinpoint with many of these legacy solutions and what's going on there. It said legacy systems have not been able to keep up with the exponential explosion.

In the volume and variety of enterprise data and the velocity with which it has created when I got started as a lawyer or 20 years ago, a big case might have been 100000, maybe a million documents and then E mail exploded in a big case became a $1 billion to 10 million documents and now in addition to E Mail you have messaged.

Data application data voice video chat and so on and a big case can be 100 million documents and the old systems simply couldnt scale to keep up with that load.

What does cloud, bringing to that problem well. This is really the magic of cloud and it's elastic compute in the cloud <unk> is one of the largest users of Amazon Lambda Amazon server list compute product and this lets us do things that were basically impossible to do with on premise software, we can spin up to.

Equivalent of hundreds of thousands maybe millions of surfers in order to build spike compute capacity that lets us deal with huge incoming and outgoing streams of data that differ in their nature of their type and thats different than the kinds of processing steps that are required. So you can.

Better deal with search capacity you can also do things like apply modern approaches to artificial intelligence, which as you know are extraordinarily compute intensive but because we have access to fleets of Gpus that we can buy for small units at a time, we can do things like run these very intensive.

Machine learning algorithms to make very specific predictions about fine grained legal issues like the relevance to a foreign corrupt practices act claim or their relevance to our fraud claim and we can do this not only once but we can update these things continuously as we get more signal from lawyers are doing their work in our platform and we can do it now.

Just in specific matters, but across all portfolios of matters, enabling this AI system to learn from the aggregate of data and work product that's happening in our platform. These are things that we are technically in feasible before the move to the cloud and so what's the impact of cloud I think it's going to be pretty profound it transforms not just the way people.

Will work, but it actually changes what's possible.

Got it very helpful. And then I guess from a follow up perspective.

Firms as you kind of touched on before.

It's been a great referral partner for you.

As you built the company over the last several years to obviously gain customers, but how do you engage with them to sell the broader suite outside of just E discovery.

The <unk> is kind of a contract lifecycle management platform, specifically for the legal industry, but can you leverage those individuals' to also sell things like review and Keith's builder for you going forward.

Absolutely if you think about what disc just very high level, what do we do we use technology to enable a much more efficient approach to that delivery of legal work and so how do we work with a law firm well for a law firm a law firm is in the business of competing in the hyper.

<unk> market for legal services by convincing clients that the law firm Ken.

Can handle their legal work in a way that drives better legal outcomes and does so much more efficiently and traditionally law firms have gotten that by counting the expertise of their partners in the training they give to associates in the relationships. They have built over time and the investment they make in learning and specific clients business and in an industry what <unk> does.

As gift partners that this law firms one more super impactful tool in their arsenal to win business and Thats. The use of technology to automate away large parts of the practice of law that don't require a human legal judgment, leading to better and more efficient outcomes for the corporate client so look our primary.

<unk> is of course, the end buyer, that's the corporate client and we talked to them about the efficiencies being driven by technology, but law firms are equally motivated to champion discuss solutions because when a law firm, it's more efficient in delivering services to our client. It makes the law for more competitive in the year.

For our market for legal services now look Thats the business answer I'll also tell you what we're hearing on the ground, which is bottom line lawyers as law firms love using our solution. They personally love it and they hate often using the solutions that they used before and that.

His magic Greg This is split sometimes business people call consumers Asian of enterprise software, but in plain English its the idea that if you combine world class engineering with it in our case, a deep love and respect for the law and understanding of how lawyers work in sync then you can uniquely build this product.

<unk> says that feel magical for lawyers and setting aside the business. They just want to use Cisco.

Wonderful thanks for taking my questions.

Thank you Mr. Byrd.

The next question is from Parker Lane with Stifel. Please proceed.

QE and Michael Thanks for taking my questions you've done a tremendous job of transforming the industry through discovery, but I was hoping you could talk a little bit more about what the tipping point is for customers as they contemplate adding review NK spillover into their existing engagements.

Maybe.

What pace of adoption, you've seen to that solution over the last six months or so.

Yeah, we're delighted by the growing adoption of products, two and three disco review and <unk> and often what we see it as part of this more general journey that clients are on to figure out what kinds of legal work actually.

The exercise of human legal judgment and what parts of work don't right. Our growth story not just for the next six months or the next year, but for the next 10 years or 20 years is about taking on more and more of the $767 billion market for legal services, where quite frankly, our largest.

Things that lawyers are doing today are not things they want to be doing theyre not things. They went to law school to do and they are not things that require human legal judgment. So what's the tipping point right. What why does someone expand their usage from discovery discovery to disk a review of the <unk> filter, it's because they see the ability to use our platform to auto.

The next category of legal work and the next category of legal work and so on.

And that we think is going to continue well beyond just our first three products. When we think about introducing more products over time. The idea is to build things that are applicable to more and more categories of legal work, increasing the breadth of things that we're able to.

Partner with legal departments.

Yeah.

Got it.

Coming off a really solid solid quarter here in the second quarter.

How was the performance recently and all the trends Youre seeing domestically informing the way that you think about the international investments and then can you remind us.

Large enterprise is thinking about in terms of cross border use of the platform today.

Yeah, we're seeing acceleration not just in the U S. But also internationally and so when we think about what's driving our growing appetite in exceptionally growing for investing internationally, it's less actually the growth of the U S business and more just the growth of the international business.

Which has been on fire.

What's interesting about our clientele right. We serve very large enterprises typically and then the law firms who represent them and if you look at both of those kinds of clients.

They are generally multinational so well before we have an office in London, We had American multinational clients using our solution on legal matters that were cited everywhere in the world from South Africa to Korea to China to Japan to all over Europe, and so on and we also had the opposite.

We had Japanese multinationals Korean multinationals, whose first encounter with disco was for handling U S cited litigation or regulatory matters again long before we have an international presence and so the way we thought about.

Launching in London, a few years ago was actually less targeted on the local London market at more about simply following our American clients.

Both the both.

Literally the clients right, but also the law firms who represented them as you know most of the large law firms now have offices all over the world and represent clients all over the world and so when we take advantage of that highly network nature of the legal industry to spread that ticket driver international expansion now what we discovered once.

We were on the ground in the U K is tremendous local demand.

And more generally what we're seeing actually in some of the non U S markets is that in many of these markets you have people who are.

Going straight to the cloud right, it's not that they've built up a big relationship with one of the incumbent kind of services based providers it's that.

They're just going directly to a cloud solution and so that's.

That's different.

And good for disco in terms of international growth.

Very helpful. Congrats on the quarter. Thanks again.

Thanks, so much.

Thank you Mr Lang.

The next question is from Brent Thill with Jefferies. Please proceed.

How many questions from investors around the size of your market E discovery versus maybe coming a broader.

Law.

Software story and I am curious if you could maybe help explain.

Your view of the current segment that Youre, serving across these three segments and how how long you could go before you feel that you could you would you would actually theoretically run out of opportunity and then I had a second a.

Follow up for Michael.

Sure, let me address that in a few ways first directly market size.

According to IDC, the Ediscovery market is $15 billion of spend today and the bulk of that spend is going to the incumbent kind of services, having solutions that disco replaces every day. So our core market for our original product just disco you discovery is about 15 billion.

Which obviously gives us lots of room to grow before thinking about expanding beyond the discovery, but of course, we already have expanded beyond the discovery with our disk a review and discount case builder products. What we're seeing is that customers that had gotten to maturity to seven figure spend on the ediscovery product those customer.

<unk> can actually <unk> or more of their spend by adopting our second.

Third products and we're seeing that not just for our largest customers, but also for customers who are early in their adoption journey. So we think the impact of review and case builder can be multiplier in terms of the addressable market.

We included in our filings that kind of bottoms up calculation of market size, which is based on the actual spend of disco customers today and different sized buckets times the number of companies in those size buckets. According to a third party source.

And that number is $42 billion. So we think theres a tremendous amount of runway just in terms of raw market size. The other way to think about it is expansion of existing accounts as we've talked about historically the account expansion journey from five figures to seven figures has taken multiple years.

Three years four years five years, we're seeing that pull forward more recently, but even with the pull forward. We have tons of customers who are early in or in the middle of their adoption journeys and if all we did was take those customers to the size of say, our 20th largest customer that.

Provides many many years of growth even at the kinds of growth rates that you saw in Q2 and of course at the same time as we're growing those accounts, we continue to add new logos at a very strong pace. So big picture. We think we're super early in our growth curves in a huge market.

That is shifting in our direction right away from services to software away from on Prem to the cloud and Thats whats driving our willingness to invest in go to market.

And <unk> just to confirm review attach is that still somewhere in the mid teens as it relates to discovery.

We're not disclosing specific attach rates I can tell you. We're delighted both by the kind of just straight growth if the review product as well as the increasing propensity of customers to be multi product customers across E Discovery review encase builder.

Okay, and just a quick follow up for Michael I think you are on your quota carrying sales team you were somewhere around 55% to 16 your goal was to add.

Roughly 10, a month from here on out and is that still the plan or are you.

I'll turn it into a different different different plan.

Yes so.

To continue to invest a ton in go to market and expand out the quota carrying reps and that's the game plan for the second half and also for next year.

Thank you.

Thank you Mr Bill.

The next question is from Yun Kim with loop capital markets. Please proceed.

Thank you key OEM, Michael Congrats on the first earnings call as a public company.

Definitely noticed a fairly substantial forward looking statement disclaimer that April already.

It's exactly what I expected with all the lawyer background over there.

So just following up on Brian's question on the add on product expansion.

Those customers with multiple products.

What is the typical usage mix between between those products just wondering how much uplift those add on products provide when a customer adds another product.

Yes, so for customers, who are using both E discovery and review and all three I guess review encase builder.

The review and case builder can be two to three X the size of the discovery. So it's a multiplier in terms of their total spend.

Yes.

Great. That's good to hear and then just.

On the gross margin dynamics.

Can you just talk about.

What drove that.

Gross margin in the quarter was there any kind of.

Factors that drove a little bit better than what you thought or did it the worst than what you thought and perhaps you know I think it's made a good time to remind us the drivers behind that dynamics for instance.

What the gross margin be impacted if you have a lot of new customer adds in the quarter.

Which would normally imply a lot of a lot more data data ingestion or is that more driven by the number of new matters or cases.

Regardless of the number of new customer adds.

So appreciate the question so theres a number of different factors that impact the gross margin.

And just like our.

Or use it where usage based and so there is inherent variability in cases, ending cases, adding people expanding data of the cases.

On the margin side, a really outsized performance like Q2.

Clearly there was a lot of data ingest it and that can potentially.

Depress margins, a little bit but on the other hand, you could have a quarter where margins go up and that just means there's not a lot of new data that's in but it really depends on a variety of factors you could have different types of data affect margins differently in terms of what types of files. They are so net net we it's kind of like on the usage base side.

Margins, there may be some variability quarter to quarter, which you saw from Q1 to Q2, but net net over an annualized basis, we're comfortable with where we have guided in the past to margins and we expect that that's going to continue in the future.

Okay, great. Thank you so much.

Thank you Mr. Kim.

There are no additional questions waiting at this time I would now like to pass the conference back over to Kiwi camera co founder and CEO for closing remarks.

Thanks for joining us today I've never been more optimistic about our business our second quarter results clearly demonstrate <unk> potential. We believe we have a tremendous opportunity to scale out our product led growth engine to add new customers and accelerate the growth of existing customers.

While simultaneously strengthening our brand and encouraging customers to adopt not just one of our products, but more of our products over time as well as expanding internationally and growing our product portfolio. We will continue to aggressively invest behind each of our growth opportunities and our.

<unk>, we can drive long term durable growth and redefine how law is practiced we thank you for your interest in disco and for joining our Q2 2021 earnings call.

Yeah.

That concludes this fiscal second quarter of fiscal year 2021 conference call enjoy the rest of your day.

Yeah.

Yeah.