Q3 2022 CS Disco Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to she has just goes third quarter of fiscal year 2022 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 Speakers' remarks, there'll be a question and answer session.
If you'd 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. Please press star one again.
I would like now to hand, the conference over to your first speaker today Lee Robinson. She has Cisco Investor Relations. Please go ahead.
Good afternoon, and thank you for joining us on today's conference call to discuss the financial results for the third quarter of 2022 with me on today's call are Kiwi camera Cisco's co founder and Chief Executive Officer, and Michael Affair, Just go Chief Financial Officer.
During today's call, we will review our financial results for the third quarter of fiscal year 2022.
That's an update on full fiscal year 2022.
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, including our guidance for the fiscal year 2022 a market opportunity market position product strategy and growth.
<unk> and.
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 depths here just go 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 statements represent our management's beliefs and assumptions only as of the date made.
Information on factors that could affect the company's financial results is included in its filings with the SEC from time to time, including the section titled Risk factors in the company's quarterly report on Form 10-Q for the quarter ended June 32022 filed with the SEC on August 12, 2022, and the company's upcoming.
Form 10-Q for the quarter ended September 30th 'twenty to 'twenty two.
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 equivalents is available in our earnings release.
And with that I'd like to turn the call over to Kimi.
Welcome and thank you for joining our Q3 2022 earnings call.
Revenue for Q3 was $34 $5 million above our guidance range.
Q3, adjusted EBITDA was negative $13 $1 million, a substantial beat of our guidance as.
As we continue to invest in our business, we are finding ways to operate more efficiently.
In 2022, we've made many key investments across our company, including a large scale out of our go to market team.
We believe that these investments enable us to remain focused on accelerating revenue growth leverage our cost structure to drive increased operating discipline across the company and improve EBITDA margin going forward.
As a result, we expect EBITDA margins to improve in 2023, and we believe we are well positioned in our march toward profitability.
We continue to add customers growing customer count to 1318 as of September 32022.
We continue to see improving productivity on our sales development representative and customer success teams as measured by leaves and the opportunities they identify.
We were thrilled to introduce new customers to every single disco product this quarter.
Recall that new customers are just one part of our growth strategy any.
Increasing multi product usage, the number of matters with each customer.
Volume of data on the platform or other key factors that impact our growth.
In Q3 tastes builder had the greatest quarter to quarter sequential increase in customers since its launch.
We continue to be excited about case builder adoption.
When customers use both ediscovery and tastes builder the discover platform becomes a common repository for all types of evidence, including both documents and testimony.
Disco hold which allows companies to efficiently implement track and manage legal holds as well as retain and preserve enterprise data cloud one long term renewable contracts with three major technology companies and signed a new enterprise scale of customers.
In both the technology and the health space.
Our usage based business model means that revenue in any given period is impacted by the volume and nature of customers' usage of each of our products.
Last quarter, we explained that the revenue was impacted by a shortfall in usage of our review product on large matters compared to high activity in the prior year, specifically on matters billing more than $1 billion in review quarter. This shortfall continued in Q3.
While this volatility in the timing and the prevalence of large matters impacts usage and given our usage based business model revenue in any particular period, we are heartened by our continued ability to retain and add new customers to our platform.
We continue to believe that long term drivers like the increase in the volume and variety of enterprise data and the velocity with which it has created as well as company is growing exposure to legal risk and legal disputes is likely to result in increased usage of our platform by new.
Listing customers over the long term across the full range of case sizes.
We remain excited about the opportunity in front of us and our ability to delight customers with a disco product experience new features and exceptional service.
As we do in each earnings call I'd like to highlight a few customer success stories from the quarter and then share some future Rollouts. We are excited about.
We were delighted to have a long standing disco E discovery clients one of the largest law firms in the world. He was just a review on the five matters since discussions began in July about expanding their just a product to use beyond the discovery there.
Their feedback so far has been very positive.
Driving multi product adoption across both new customers and our existing customer base is a core part of our long term growth strategy.
Internationally, we began to work with a new customer in the medical services industry.
It was an inbound to disco after the company's leadership had heard of disco through their outside counsel demonstrating the importance of good relationships with the lawyers with law firms, who can introduce us to their clients.
This customer had a large litigation matter and chose Cisco for collection Ediscovery and review.
Disco AI significantly reduced the number of documents they needed to review to prepare for their trial that is set to begin next year.
Not only is our customer happy but they are outside counsel have also expressed high customer satisfaction as they have been supported night and day by our EMEA team under tight deadlines.
Another client of Discos since 2019 with multiple matters have the discover platform wanted to expand their usage of discount.
They have historically used best E discovery and review so we worked with them to package a three year comprehensive multi product bundle to best address their needs.
This new package has a built in commitment with room for growth and the addition of more products.
Longer term enterprise deals like this kind of increase our revenue visibility over time.
We also have a civic client summit with one of our largest corporate clients and their outside counsel teams focused on maximizing the value of AI in their disco experience.
I think more deeply into the disco products and planning and how just go to best serve their needs.
Our client and their outside counsel got to meet the broader disco team who act as champions for them every day to provide the optimal outcomes and our key partners and their use of discounts.
These habits and quarterly business reviews are a great way for us to educate a customer or the latest features and best practices as well as hear client feedback on what we can build to best serve client needs. This is all part of our comprehensive customer relationship at assurance strategy to uphold the customer.
Faction and longevity overtime.
I would like to touch on new product releases during the quarter.
We rolled out initial phases of our organization metrics feature set which provides managers up to date metrics are their usage and data volumes on disco. It allows self service reporting for customers. This.
This is particularly attractive to our corporate customers in general counsels to want to see how many gigabytes of data uploaded before particular matters. If a database is active and who has access to the databases.
Organization metrics includes visibility into overall data usage across all matters and review databases and insight into activities impacting billable data usage.
We are also excited to have recently announced collect for slack within our hold the product.
With the continued rise of enterprise messaging and collaboration applications.
Data like slack can be difficult expensive and risky for organizations to preserve collect and review for compliance investigations or litigation.
And that's why we've built collect for slack to enable legal teams to seamlessly preserve in place collect and promote slack legal hold data for review all in the same interface collab.
Collect for slack integration with the slack discovery API enables collection of old leave the data needed for a legal matter and the collection of that data only when it is actually needed minimizing storage costs and security risks related to having company data live on third party application.
<unk>.
More broadly disco hold centralizes the hold collect review workflow in a single interface, making custodian notifications and tracking in place preservation and now collection faster for legal and it teams.
With the release of collect Chris Slack, we are delighted to grant legal teams additional visibility into and control of their legal hold in ediscovery collections processes to get to evidence more efficiently.
Building on these critical capabilities, we plan to expand our whole connectors to additional enterprise collaboration solutions that legal and enterprise professionals rely on in their day to day work.
Within our go to market organization, we previously announced the transition of Andrew's Chebeck, our former Chief revenue Officer.
Andrew has been with disco for nearly five years. He helped US scale. Our go to market organization grow from a startup company to a public company and COO.
Cross the 100 million dollar revenue milestone.
We appreciate Andrew's commitment to disco and wish them well, but his next career I've never.
The team leaders for sales marketing and services, who had reported that Andrew will now report directly to me, which is the original organizational structure at disco.
The current leaders of these teams came the disco with incredible experience. This guy's senior Vice President of Global sales look Mcneill joined us in 2021 with impressive enterprise software sales leadership experience.
Prior to disco Luke helped scale the enterprise businesses at Amazon Web services at Facebook.
Melody Jones Senior Vice President of professional services started with disco in 2019 and helped launch a review of the services offerings.
Melody has deep legal debate and process implementation expertise, having led teams that inventors hereof and consulting and catalyst.
Tom <unk>, our senior Vice President Chief Marketing Officer has extensive <unk> enterprise marketing experience and expertise in building enterprise brands, having previously led marketing teams at Mongo DB advantage. Additionally.
Additionally, we recently promoted one of our own law and Caruso to be Vice President of field sales in North America, given her tremendous success as our regional sales leader and before that as a first line sales manager at discount.
Our immediate focus areas as a go to market leadership team includes deal level coaching and pipeline rigor.
Ensuring we cross sell in every deal and the <unk>.
Focus on customer success, and growing accounts to multi product for enterprise adoption.
In 2022, we invested heavily to scale out every part of our business, especially our go to market organization that is focused on driving continued revenue growth.
Now that we have made those investments our focus in 2023 and beyond will be on driving organizational effectiveness and efficiency.
I look forward to working with the rest of the management team to leverage what we've built to both accelerate revenue growth and make steady progress towards profitability in the coming years.
I'll now turn it over to Michael to discuss our financial results and guidance.
Thank you <unk> I will now discuss the details of our recent quarter results and an update on our outlook for fiscal year 2022.
As a reminder, and for those who may be new to the disco story. Our business is primarily a usage based model that is driven by the number of matters nature of usage on the platform volume of data length of time on the platform and other factors that may impact revenue in any given quarter as.
As Kieran mentioned Q3 revenue was $34 5 million up 15% year over year and above our guidance range in discussing the remainder of the income statement. Please note that unless otherwise specified all references to our expenses operating results and share count are on a non-GAAP basis.
Gross margin in Q3 was 76% up from 74% in Q3 of the prior year as a reminder, our gross margins fluctuate from period to period based on for example, the amount and types of data ingestion and managed on our platform. We expect gross margin to continue to be within the bands we have historically seen.
Sales and marketing expense in Q3 was $18 6 million or 54% of revenue compared to 43% of revenue in Q3 of the prior year. This represents an increase of every $5 6 million in the quarter year on year as we have mentioned over the last few quarters, we've been focused on investing in scaling I go.
To market organization at this point, we believe that our sales and marketing teams are reaching the point of scale appropriate for near term objectives.
Research and development expense in Q3 was $13 8 million or 40% of revenue compared to 31% of revenue in Q3 of the prior year. This represents an increase of over $4 4 million in the quarter year on year as we continue to invest in teams to support product and feature development.
General and administrative expense in Q3 was $7 9 million or 23% of revenue compared to 26% of revenue in Q3 of the prior year. This represents an increase of approximately 0.1 million in the quarter year on year.
Operating loss in Q3 was $14 1 million, representing a margin of negative 41% compared to negative 27% in Q3 of the prior year adjusted.
Adjusted EBITDA was negative $13 1 million in Q3, a margin of negative 38% compared to a margin of negative 25% in Q3 of the prior year.
Overall, our EBITDA was better than guidance due to strong gross margins and tighter opex spend in the quarter.
Net loss in Q3 was $14 1 million or negative 41% of revenue compared to a net loss of $8 2 million or negative <unk>, 27% of revenue in Q3 of the prior year.
Net loss per share in Q3 was 24 cents compared to a net loss per share of <unk> 17 cents in Q3 of the prior year.
Turning to the balance sheet and cash flow statement, we ended Q3 with $213 1 million in cash and cash equivalents.
Year to date operating cash flow in Q3 was negative $36 7 million compared to negative $18 8 million in Q3 of the prior year.
Now turning to the outlook for fiscal year 2022, we are reiterating our revenue guidance in the range of $132 million $236 million, representing 17% year over year growth at the midpoint.
We continue to anticipate that our original product ediscovery will be over 100 million in revenue in 2022 within an annual growth rate of more than 30% for fiscal year 2022, we are updating our adjusted EBITDA guidance in the range of negative 54 million to negative $15 million representing adjusted.
EBITDA margin of negative 39% at the midpoint.
As Kiwi mentioned since our IPO, we have significantly invested in the business across every major function to attain the scale. We believe is needed to drive our increasing penetration of the market.
Going forward, we believe these investments give us the resources, we need to achieve our growth goals as part of our March towards profitability. We are planning for EBITDA margin improvements in 2023 and beyond we will provide more details on this and our outlook for 2023 on our Q4 earnings call next year.
I'd like to now turn the call over to the operator to open up the line for Q&A operator.
Thank you.
As a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Jackson Ader with Moffett Nathanson Your line is open.
Great. Thank you.
Our questions guys.
The first one is on the sales organization.
Change with our Chief revenue Officer departure, there late in the quarter. So just curious what are some of the changes that you think.
Are they come what needs to happen in terms of either.
Hiring plans ramp plans productivity.
Any detail you can provide me Greg.
Sure. The basic message is steady at the Tiller, we think that Andrew did a wonderful job over the last almost five years, taking us from frankly, an early stage start up to a public company growing revenue more than 10 X and taking us over the $100 million revenue.
Milestone.
The folks who reported to Andrew our heads of sales marketing and services can we talked a bit about in our prepared remarks are continuing on and will report directly to me.
And that's the original organization structure at disco it means that all get more involved in go to market, but it does not represent any fundamental change in our go to market strategy I've long been a believer that in scaling out of go to market organization. There are no silver bullets and results depend much more.
On day to day execution, focusing on every stage of the funnel and ensuring that we are treating every opportunity sacred winning as many opportunities as we can and ensuring that we're cross selling into those deals and focusing through our customer success team on ensuring customers have a great experience.
Initial adoption and as they ramp their spend with the eventual goal of full enterprise adoption one of the things. We're very focused on that I highlighted in my prepared remarks is the multi product strategy that I talked about at our annual earnings call.
Last quarter, we saw some great data points across all of our products with an increase quarter over quarter in the number of matters.
Active in review some grade hold renewals as well as new hold sales to enterprises in the tech and health care spaces, and the largest sequential quarter over quarter increase in case builder adoption.
So thanks.
Thanks for that can you just a follow up on the product.
One of them next year.
Still looking for.
Flagship E discovery.
Product continued to outgrow the rest of the portfolio what exactly.
Okay.
<unk> is a brand new sales that maybe arent bundling all of the packages together the cross sales and client ediscovery customers that maybe aren't picking up case better review as quickly as you thought that's causing that in the queue.
Under grow the E discovery.
SKU.
The principal issue is what we highlighted on the last earnings call and what's continued on this earnings call and last quarter, which is a shortfall in the number of very large review users. So thats review usage that bills more than a $1 million in particular.
Quarter last year and extending into Q1, we saw elevated usage of review on very large matters like those that fell away in Q2 and that shortfall has continued in Q3, resulting in challenging gross numbers for a review of business across the.
The rest of the product line as I highlighted in my earlier answer and in our prepared remarks, we're pleased with the growing adoption of those products. Although of course, they remain relatively small in scale as compared to our original ediscovery product.
Understood. Okay. Thank you.
The next question is from Tyler Radke with Citi. Your line is open.
Yeah. Thanks for taking the question so last quarter, you talked about kind of Derisking the guidance.
Some of these larger.
X L deals that you had on the review business.
Assume that none of those really came through here with guidance I'll start with the results.
In towards the high end it would be.
Sure how are you thinking about the review business heading into Q4 has there been any change in the pipeline.
Maybe help us understand if youre not expecting any of these larger deals in Q4, why is that and when would you expect them to return is it.
A function of the macro or is there just help us understand.
You know that.
This is something that youre seeing in the industry more broadly versus just the nature of your pipeline. Thank you.
So we delivered a beat in the last quarter on revenue relative to the guidance that we provided and have reiterated revenue guidance for the full year in terms of review as we've talked about with respect to all of our business. Our usage based business model means that revenue in any.
Particular period may be impacted by the nature and volume of usage on our platform and customers may not know exactly how big their matters are until well after they sign a contract or start the matter with Cisco the size of a matter and the timing of that.
Activity on that matter in our platform depend on the nature of the case and the timing or nature of rulings from courts are regulators. For example, a customer may have a new patent infringement lawsuit and that lawsuit might start out as relatively small in data because it involves state.
One product or just a small part of the business, but as the case proceeds that data might blow up because it turns out that.
Some parts that are part of the electrically infringing product are also allegedly infringing and third parties are brought into the data blows out the opposite thing can happen to an investigation from a regulator can start out being extremely widespread think of a foreign corrupt practices Act investigation and then early on in <unk>.
Be possible for lawyers to limit down the size of that investigation to a particular country or a particular business unit again. These are things that happen in the middle of.
Particular legal matter and so they're unknown and largely exogenous from the point of view of both our sales team and the customer and that's why we've reiterated that revenue can fluctuate from period to period again, just depending on the kind of nature of the matter is on our platform and the time.
A few soon ship different aspects of our platform on those matters.
Yeah, and then sorry, I didn't mean to short change you until you didn't beat the guidance you came in.
500, K above the high end I just wanted to clarify there was no.
None of those large deals happened in the quarter and in other words.
The data we saw was more from the E discovery side.
That's correct. So the shortfall in large reviews meeting reviews that bill more than a million dollars in a particular quarter that started in Q2 and has continued into Q3.
Great and.
Just on the go to market side Kiwi now that the sales team is kind of rolling up to you directly.
How are you.
Just thinking about the incentive structure next year now that you have.
<unk> invested a lot you have hopefully a lot more ramped sales capacity as it is going to be much more of a focus on.
Expansion.
Or are you continuing to incentivize new logos, just help us understand how you're thinking about that as you've gone through the planning process. Thanks sure. Yeah. If you think about the big drivers of our growth right, it's adding new customers expanding existing customers and driving multi product adoption. So.
We're right in the middle now of incentive plan design for the coming year and those are the things that are top of mind for us as we think about how to structure. The plants now the basic structure of the plant's hasnt changed which is that they incentivize revenue and because almost all of our customer base is usage based.
They incentivize driving usage. So a salesperson is as incentivized to go take an existing customer and expand our relationship with them for example, adding more lawyers to the platform or more areas of law or more product lines, but whatever however, the customer is structured as well as incentivizing.
Salespeople to go drive multi product adoption in those customers one area, where we are paying a little bit more attention in our incentive plan design is actually how we incentivize our customer success professionals historically, we've thought of a variety of different things that.
They do have linked their plans to sort of aggregate results, but going forward, we're going to be linking incentive comp for customer success much more directly to growth and if you look at our customer base and think about sort of the stages of the customer success process. There is a new customer or even in <unk>.
<unk> group within a customer and getting them from zero to once we think of that as Onboarding and then theres a long phase again in our business. This can be three to five years. It can be faster for people out there second journey, but we call. It growth it's getting the customer first from their first matter to six matters have been from six matters to set a full enterprise.
<unk> multi product adoption and then at the far end of that journey. There is customers who are at enterprise adoption and our engagement with them is much more about maintaining the relationship it looks a lot more like renewals in a subscription business and then of course, introducing new products to those customers like home.
And request as we continue to grow so I think with sales the basic message of incentive comp is it's pretty similar with some changes around the edges in customer success. We are really heavily aligning that group towards growth representing the importance of existing account expansion and also the multi product strategy.
To our future growth plans.
Thank you.
The next question is from Koji Ikeda with Banc of America Securities. Your line is open.
Hey, guys. Thanks for taking the questions apologies I'm jumping around from a couple of calls here. So if you did mentioned this in the prepared remarks apologies on my behalf, but I just wanted to ask you.
How to think about balancing growth and profits in this type of environment.
If growth looks like it's going to be call. It maybe a durable 20% grower versus previously thought.
Much higher trajectory, how do you think about balancing growth versus profit right now.
So as we tried to emphasize in our prepared remarks.
We have changed our philosophy.
Operating margins a little bit in light of both recent growth results and the macro environment. So what we've said is that we are very much focused now on getting leverage on the investments we made across our business over the past six quarters and we believe we're in a position to make steady.
<unk> progress on our March toward profitability and our long term operating model in 2023 and beyond now that does not mean that we've given up on growth I don't think I or Michael would be here. If we did not believe there was a tremendous opportunity to continue adding new customers since we have them.
In Australia, we can do even in the challenging macro environment, we increased customer count to 1319, and also a tremendous opportunity to expand our relationships with those customers, including by driving multi product adoption of newer products like review case builder request and hole, but it does.
Meaning that in this quarter and going into the new year. We are taking a sharp look at every part of our operating expenses staff and non staff. We're also investing in and really accelerating and ongoing investment in globalization, giving us access to lower cost talent in other parts of the world and in.
In General we think we are going to strike a more balanced note between revenue growth and operating margins going forward.
Got it thanks, Kiwi and then just one follow up if I may here for for Michael net net revenue retention again apologies. If you guys talked about this already but just directionally how to think about net revenue retention was it may be up down or flat.
Q3 versus last quarter.
Thanks, guys.
<unk>. Thanks for the question. Good question. So we've reported on dollar based retention when we went public I believe it was the Q1 number and then again when we file the K I expect it will also released that number again, when we file the K.
And likely February of next year.
That number is obviously based on revenue and it's variable based on usage. So it moves around a lot and it has moved around in the past as we've reported publicly so you could expect to see that that is going to be variable and it's going to we expect it will continue to move around.
Got it thanks, guys. Thanks for taking the questions.
The next question is from Derrick Wood with Cowen Your line is open.
Hey, guys. Thanks for taking my questions.
We hear a lot of companies.
Talking about seeing optimization.
Usage of their public clouds on kind of core enterprise applications, what kind of behavior are you seeing out there when it comes to Europe .
Your workload your customers.
Brooke focus more on cost containment is that a trend that's happening in looking at a better use your cloud and optimize consumption.
I think it's no secret that hadn't so finance at every company are doing with Michael is doing a disco and seeking to reduce spend across every part of the business legal.
Exception and so we have had customers come to us and ask us how we can help them achieve their spend reduction goals.
I'd point to a few things over the past year or two roughly we've shipped a variety of features in the product that help people optimize their data footprint. So I think just over a year ago, we shipped a disco ECA, which is a lower cost environment, where people can stage large.
Collections of data.
Can use AI and other tools to identify what actually needs to go into active review at a higher price point and then can seamlessly promote.
Data into active review shortly after that a few quarters. After that we announced the addition of the hold product and one of the great selling points of the whole product is that it allows preservation in place. So historically in order to preserve data for legal matters you have to collect it make a copy of it and store it in a platform like this.
Can you discuss where youre disco ECA withhold in place you don't have to do that and so you arent paying double right ones for the data and saying slack or Microsoft or Google and once for the data getting any discovery platform. That's one way in which our products can help our customers optimize usage I think the final point that we made.
He is when customers come to us.
And talk about reducing their legal budgets and making them more predictable, we like to lean in and emphasize that adopting disco as illegal platform can do exactly that it's not that the customer should reduce their spend with us it's that they should adopt <unk> in order to reduce.
And to make more predictable the total project cost of legal matters, often by review by reducing.
Legal lawyer billable hours on those matters that materially through the use of automation and artificial intelligence to deliver a high quality legal work product more efficiently.
Yes that makes a lot of sense.
My second question is on on the sales capacity side, I mean, clearly a big build out year for you.
Did you dialed back the kind of level of sales heads versus your original targets, just given the macro and that.
And the revenue outlook and how are you feeling about ramp to productivity and maybe do you have a sense as to what percentage of reps will be considered productive as you exit this year.
So we did tap on the breaks a little bit and we actually talked about that on last quarter's earnings call. We.
We have observed on last quarter's earnings call that some of our newer reps had a higher appetite for lead generation than some of our more established reps, who benefit from big sort of disco referrals cycle right for existing customers referred new customers and supply and material part of there.
There was sort of lead supply. So we did that last quarter on a relative basis, we reduced our investment in quota carrying sales capacity and increased our investment in STR CSS and marketing lead generation programs. I think it's also fair to say that in the aggregate.
We have reduced across the board and the level of our investment in go to market relative to the ambitious plans that we announced at the time of the IPO, but what we've done and what we'll exit the year with still represents a super large step function increase in our go to <unk>.
<unk> capacity, both in terms of quota carrying heads and in terms of lead Gen and all the other assumptions that go into making those quota carrying heads effective.
In terms of ramp, but we still have a lot of sellers, who are very early in their ramp with disco folks hired this year and even in the past couple of quarters, but one piece of data that we're pretty pleased with is if we look at the performance of those reps who are in their first 12 months of tenure and compare them to the performance.
Of reps, a similar tenure earlier and discuss history, we're actually seeing the new class of reps outperformed those historical class of reps, who we know developed into successful sellers at <unk>.
One of our big focus is in the new year is really doing our best to treat every opportunity is sacred and what I mean by that is involving senior people at disco proven cell there as subject matter experts on a deal by deal level, especially with our newer sellers too.
Sure that we're putting our best foot forward in terms of presenting to customers the value that this provides.
And I think that will help us close more deals that will help us close bigger deals that will ensure we're doing cross sell and up sell correctly, but perhaps most importantly, I really think that's the best way to train and ramp new reps right seeing senior people do it being on a sales call with me or with Luc or with other senior leaders of disco.
That's historically, how we've trained the best reps, a disco and we're continuing to make that investment for the newest sellers as well.
Got it thank you.
The next question is from Arvind <unk> with Piper Sandler Your line is open.
Yeah.
Hi, Thanks for taking my question I just wanted to go back on the.
The topic of margins.
Certainly alluded to basically operate again update.
On the February earnings call.
As to sort of the.
Kind of a recasting of margins.
Well I'm not looking for any kind of specifics directionally.
Is this going to be a hard shift towards.
Prioritizing margins.
And then the follow up to that is.
Would there be any kind of compromise or kind of streamlining of R&D type of expenses or did come more in the kind of almost like sales and marketing type of.
Efficiencies that youre looking to kind of drive increased profitability.
Really good question. So what we said in the prepared remarks and we're we're also planning for next year as we're kind of in the middle of the budget process is really driving towards marching towards a path to profitability and what does that mean, if you look at the investments we've made over the last six quarters since the IPO.
We significantly beefed up the go to market team and we've also significantly.
Made a large number of investments in the product team.
As we move into 'twenty, three and we look towards the path to profitability and improved adjusted EBITDA margins in 'twenty three and beyond.
The goal really is to just optimize and leverage what we've already invested in better and.
In light of the macro environment, just more attention and I'm not saying, we haven't have attention in the past and operating discipline and Kiwi mentioned this earlier really looking closely at all non staff and also staff cost and also globalization. We are looking at globalization. We've already have heads in a variety of countries throughout the world.
And we're really looking at leveraging globalization to attract and retain the best and the top talent and so we believe that we can balance both the growth that we expect as well as the longer term goal, which is the path to profitability.
Perfect. Thank you very much.
The next question is from.
Brent Thill with Jefferies. Your line is open.
Keeping one of the questions. We get is legal volume should be more resilient in a tougher macro. So many continue to ask you had a pretty material deceleration is it just lower volumes is this execution. How do you how do you frame. This up in your visibility now going into the front part of next year.
Can you just described.
What youre seeing from your overall pipeline as we head into the new year.
Look I think there are some challenging headwinds in our business. The principal one being the shortfall in large review matter. Instead began in Q2 and continued in Q3, and it's especially challenging from a comp point of view given that.
We have such elevated usage in the form of if those large review matters for about a year going into Q1 of this year.
The principal thing that we're seeing.
So we did not expect.
Also we are being somewhat judicious in our outlook because of the macro environment and our uncertainty about what will come to pass I think you have puts and takes there right. So on the one hand, you have the historical behavior of legal which is that in the down part of economics.
Cycles disputes go up right litigators become busier, that's certainly what happened after 2008 on the take side you have to go to someone else's earlier question. The fact that Michael's equivalent at every business is going around department by Department and asking people to limit usage.
Constrained costs and.
<unk> is not immune from that kind of conversation, although as I said in answer to that earlier question. I think we have some compelling reasons by increasing disco usage actually in the past to controlling legal costs more generally so I think that uncertainty is also.
Causing us to moderate our outlook now that said there are a ton of things that we think are super promising about the business and what we're seeing and maybe the most prominent of those and said we've continued to steadily grow customer count now to 1318. Despite this challenging macro environment. So.
You know I talked to a lot of my peers at other software companies and I think a lot of categories of software sales were really challenged in Q3, where people were just putting off purchases in that switching and we haven't seen that happen in our business. There is continued interest in making the jump from services based solutions to software based solutions.
Legal and I think the value proposition that we're delivering to our customers of reducing legal spend in the aggregate, making it more predictable and perhaps more importantly, giving them a solution that actually can scale. So that their legal budgets don't continue to blow up.
Just in the current climate, but next year and the year. After that I think that continues to resonate in the market as demonstrated by growth in customer count.
The performance of our lead Gen and expansion organizations continues to be a positive point about the business and the fact that those teams continue to set records on unit in aggregate productivity means that when we call customers. They are receptive to our call right. That's that's sort.
Exactly what that means red desert folks willing to take meetings with us about the benefit that the legal tech solution can have to their business and then the final positive point I think it's really multi product adoption, which never mind 2023, I think if we think about the long term growth strategy of our business.
That multi product strategy underpins a lot of it and across all of the newer products. We have good things to say that we included in our prepared remarks, a continued increase in the number of review matters quarter over quarter, the largest sequential increase in case builder adoption quarter over quarter and some great enterprise.
Hold deals right, where we're getting into.
Company and some of these that are accusing disco ediscovery, yet and getting in at the front end of the process, where they're preserving data for use in downstream litigation. So I would say we've been chasing debate by the results and by the macro environment, but I think there are puts and takes and there are many good facts about what we're seeing in the business as well.
Michael can I just ask a quick one on on pathway to profitability in the other steps other than just air breaking go to market and sales reps what else are you putting in to ensure that you get to that point.
Well I mean.
What we've said a little bit in the prepared remarks, and what I believe I answered in my earlier question.
We've invested a significant amount since the IPO and we feel that we've reached the scale necessary across most of our functions.
It's going to support where we go next year and also in addition to that globalization and in addition to that really a very close look at continuing operating leverage operating discipline and it's clearly a much different macro environment and I think we have the.
And a focus that all my CFO peers have in terms of really looking at every cost and making sure that we manage efficiently we still want to invest in growth, but we feel like we've made significant number of investments.
For the last six quarters that will support us as we continue to grow the business.
Thank you.
The next question is from Scott Berg with Needham <unk> Co. Your line is open.
Hi, Kiwi and Michael Thanks for taking my questions here I guess I have two.
The first one is a question I've had from several investors over the last quarter that I don't have a great answer for it.
Was hoping you all could clarify and add some color to is on the large review cases that it seemed like you were expecting at least in Q2 that moved out of the quarter given the results here in Q3 likely obviously did not did not occur given your commentary what would cause those large re.
Used to move not necessarily one quarter, because that could be a couple of weeks or a month or maybe a couple of months, but six months multiple quarters help us understand in the environment I guess with your customers that could move the usage to that type of extreme.
Well I don't think that what we're talking about is customer has a large matter that matter has a large review they are intending to use disco review, but something has gone wrong with the timing like Theres, a stay or that's not what we're talking about I think what we're talking about this just customers not having those.
Large reviews on our platform. So it's not a question of timing, but maybe a question of okay.
<unk> and what can drive that some of it is just does a customer happened to be sued or investigated in a matter that involves a large amount of data.
One that we've talked about publicly is the opioid litigation right, which was all over the news last year, and which generated quite a bit of usage for us, but many of those cases.
I don't think many new ones are being filed and I think a variety of them have been or are being resolved. That's one example, right.
I think more generally.
Until the review business gets to larger scale, it's going to be possible for these large review.
I kind of use cases to impact revenue in any particular quarter and last year, we saw that happen to the good Q2 of last year was the tidal wave of goodness and this year, we're seeing what happens when that tidal wave goes out, but we're not seeing any fundamental shift in how.
Many large matters there are in the world or sort of anything like that and so our hope would be that as we get.
View usage to larger and larger scale eventually we get it to such a scale that the impact of any particular large matter on revenue from the review product is small relative to the aggregate revenue from review and that of course is what we've seen in Ediscovery as E discovery has gotten to greater and greater scale there.
There are still large ediscovery matters and they can come and go and the timing.
Exemption essence, sometimes hard to predict.
But even very large discovery matters as a percentage of overall revenue for me discovery usage are now a relatively small and that's just not true yet a firm review product.
Got it helpful. And then a follow up for me from the answer you gave earlier around.
Sales investments Kiwi you change the composition sounds like from.
Drag to ease or field reps to str's share over the last maybe quarter or two to kind of changed what that composition looks like.
What does that tell us.
In the in the disco model around.
What your go to market activities are going to look like over the next three to maybe 12 months or so is this really more about trying to sell more of the top of the funnel.
STR wood, what often work with there's not enough opportunities later in the funnel or is it maybe a change in terms of the size of the customers that you're starting to look like look at today and have an opportunity to sign any any color around what that change means for you it would be helpful.
Sure first of all to give you a context I'm talking about a relatively small change on the margin and not some kind of fundamental.
I mean think on the order of like low double digits number of people switching from one to the other since there's not a huge change, but what we observed and I talked about this a bit on last quarter's earnings call. Instead, because so many of our quota carrying sellers are new so with discount.
Less than a year.
They don't have the benefit of a big existing customer base that they sold into and the benefit of that base is that it tends to generate referrals.
So we have the core of our model here is that we're really good at building new product experiences that lawyers love and when lawyers love using the disco platform. They introduce our sellers to their friends and colleagues both within the same organization and at other organizations that are sort of less.
<unk> of customer satisfaction, coupled with a usage based business model to power growth that's been a key part of our historical success. So for newer reps, that's a lot harder right because they have to get the flywheel going by signing up their first set of customers, who then generate referrals to more customers and sell.
And so what we're finding is that some of those newer sellers had to excess sales capacity or another way of saying that is not enough opportunities and the way we address that was increasing relatively speaking our investment in lead generation in the form of STR is customer success and marketing programs.
In order to get more leads and opportunities to then sellers early in their ramp.
Got it very helpful. Thanks for taking my questions.
As a reminder, please press star one if you'd like to ask a question.
Next question is from Parker Lane with Stifel. Your line is open.
Yeah, Hi, thanks for taking the questions Kiwi curious if theres any change in the number of customers that are looking to lock in subscriptions in the face of a more uncertain macro I think you referenced during the prepared remarks is that something that you would expect here over the next 12 months or is that sort of a one off situation.
I don't want to overstate it so there are.
Some customers who have come to us with exactly the motive that you described right a desire to increase the predictability of their spend.
Also can reduce their spend if at all possible.
Those kinds of subscriptions.
This is disclosed in our numbers they still represent a much smaller part of our business than our traditional usage based offering I actually think this cuts both ways.
Some of our newer products like hold lend themselves to this kind of multi year subscription kind of relationship with customers and <unk>.
Again in the spirit of being somewhat uncertain about the macro environment and chastened by recent congrats results, perhaps it's good for us to sign a few more if there is a long term subscriptions and bundling some other products with them. So.
There's no fundamental shift in what we're seeing or what we're doing but when customers do want to engage with us on a subscription basis. We're certainly open to having that conversation I think on the margin some of our newer products actually lend themselves to that kind of deal structure more.
Got it I appreciate it I'll leave it at one in the interest of time. Thank you.
Okay.
There are no further questions at this time I'll turn it over to Kiwi camera co founder and Chief Executive Officer for any closing remarks.
Thank you for joining us today I want to reiterate our strong belief in the opportunity ahead of us in the products. We have built that are transforming the legal industry and in our ability to execute on that opportunity. We appreciate your interest in <unk> and for joining our Q3 2022 earnings call.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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