CS Disco Inc. Q1 2023 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to see.
This goes first quarter of fiscal year 2023 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.
The speaker's remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad and if you would like to withdraw your question. Please press star one again I would now like to hand, the conference over to your first speaker today Alexi Lucky child.
Investor Relations. Please go ahead.
Yes.
Good afternoon, and thank you for joining us on today's conference call to discuss the financial results for <unk> first quarter of 2023 with me on today's call are Kiwi camera, viscose cofounder and Chief Executive Officer, and Michael It. There. This was chief Financial Officer. Today's call will include forward looking statements within the meaning.
The safe Harbor provisions of the private Securities Litigation Reform Act of 1995, including but not limited to statements regarding our financial outlook and future performance or future capital expenditures market opportunity and market position product strategy and growth opportunities and developments in the legal technology industry. In addition to our prepared remarks are earning.
Press release, SEC filings and a replay of today's call can be found on our Investor Relations website at IR <unk> com.
Alluded 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 March 31, 2023 filed with the SEC on May 10, 2023, and the company's annual report on Form 10-K for the year ended December 31, 2022 filed with the SEC.
On February 24 2023 in.
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 on financial performance prepared in accordance with GAAP reconciliations between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalent.
Is available in our earnings release, and with that I'd like to turn the call over to Keith.
Thanks, Alexie good afternoon, everyone and welcome to our earnings call for the first quarter of fiscal year 2023.
Revenue for Q1, 2023 was $33 1 million adjusted EBITDA was negative 13 billion and total customer count grew to 1388.
Revenue was above the high end of our guidance range and adjusted EBITDA significantly exceeded our guidance range we.
We have made steady progress on the operational changes that we expect will lead to profitability, including the launch of our new office in Delhi as.
As Michael will share in more detail. This is allowed us to improve our adjusted EBITDA outlook for this year and pull forward our anticipated timeline for achieving positive adjusted EBITDA from Q4 2020 for Q3 2024.
Q1 was a very exciting quarter for us for both the product and the sales and marketing perspective.
First let's talk about product.
We are huge believers in AI at disco.
Advances in large language models that you will have read about in the news as well, there's less heralded but equally important advances in technologies like vector search represent in my opinion. The most important technology development since the mass adoption of the internet and the diabetes.
These technologies, which AI labs throughout the world have been working on for years are finally ready to be incorporated into products that can deliver real value to every day users.
Base.
<unk> is differentiated by her ability to answer questions based on private data rather than the public internet or public corpora books and articles to do so at E discovery scale and databases that may involve millions or tens of millions of documents.
Evidence in support of her answers and to do all this while integrated into a secure platform that lets lawyers do other legal work like ingesting data exploring and analyzing documents orchestrating large scale reviews, and preparing productions or disclosures.
We launched Cecilia at legal week in New York, and allowed customers and prospects to begin testing or asking her questions themselves.
At these initial demonstrations and then conversations with our top customers. We are hearing fantastic feedback lawyers immediately see the power of Cecilia to accelerate the process of understanding the packs and finding evidence and legal disputes and investigations.
Would have loved to have had Cecilia helped me on cases, when I was a practicing attorney.
We anticipate that facility will be generally available in 2023. After an initial stage rollout we will provide further information on pricing at that time as well.
What is <unk>.
Exactly what does it do how is it differentiated.
This new AI is a collection of technologies that is fully embedded in our platform.
That is product ties to allow lawyers to seamlessly use AI in the course of legal work.
<unk> AI powered as predicted tax which helps lawyers identified documents related to particular legal issues.
Our predictive tags technology predicts Howard lawyer with Targa document based on how lawyers have tagged other documents in the past.
Or every document predicted tags generate scores for each pad that indicate how likely disco AI believes the document is to be tagged a certain way users.
Users can search by these scores defying documents that are likely to be what they were looking for they can incorporate predicted tags scores as part of more complicated searches in filters and search and visualization.
Predictive tags can help them review documents more quickly by telling them what they should be looking for in the document.
Predicted tags can be used to sort documents for review and ensuring that lawyers are looking at more of the important documents per unit time invested and that lawyers find more of the important documents more quickly.
Predicted tags can be used to do real time quality control on human reviews, identifying areas, where human review as disagree with disco AI as a recommendation.
This girl AI powered topic clustering with automatic indexing, which can take millions of documents and organize them by relevant topics label using terms and phrases used if the actual documents.
This allows lawyers to understand what topics are covered by documents in the database before beginning a review.
It helps lawyers learn that particular language or jargon used in the database and in conjunction with filtering and search visualization. It lets lawyers see what topics are covered in particular subsets of a database for example, if the documents from a particular witness or party.
And this can AI powered as cross matter AI, which allows lawyers to use models trained on earlier matters on new matters.
This allows lawyers and ultimately their clients to get leverage on the work they have invested in prior matters to accelerate review, our new matters that involve similar facts or similar legal issues.
Just as a lawyer, who has handled a certain kind of case many times in the past can be more efficient than a lawyer, who is handling that kind of case for the first time. This go AI can become more and more effective as it learns across matters not just within a single matter.
What do we think about discuss product roadmap, we think about modern AI technologies unlocking features in four areas.
First is question answering.
Cecilia is an example.
Secondly, as document analysis.
Modern AI can be used to tag and parse documents labeling summarizing it extracting data as instructed and natural language or a document by document basis.
Third is drafting a document generation.
Fourth is providing a natural language user interface for <unk> platform, where a user can simply ask because the computer to do what they want and making our products even easier to use.
Our ability to take modern AI and integrated into a broad platform, where lawyers already do their work and through which we have access to private data at work product to power. Our AI models represents a material advantage for disco relative to pure play AI companies.
To be clear these are ideas for future product development.
That product features that we have today.
But we believe this framework can help you understand how we are thinking about product timing modern AI technologies into our platform.
Artificial intelligence is not the only element of our platform. We are excited to discuss.
This quarter, we will also announce the release of timelines in case builder.
Timelines allows lawyers to collaboratively create events and facts.
Lake Depositions documents and other evidence is the <unk> platform and elsewhere.
And assemble them into timelines and chronologies that the legal team uses to understand develop and present their case.
As part of our strategy to be the MTA and legal technology provider.
Whereas E discovery generally occurs well into illegal better case builder is now well positioned to capture the matter in the boat with a client comes to a lawyer with an issue.
Our customers have been asking for the capability that <unk> provides for some time and we are very pleased to bring it to market.
There are other under the Hood features we released this quarter as well that are core to improving <unk> capabilities.
One example of this is live re indexing.
<unk> as we develop our products, we make changes to the underlying data or search architecture that enable improved performance or new capabilities.
Live re indexing automates the process of moving databases that are out of older versions of our platform to the latest versions.
Previously this was a time consuming task managed by human engineers on a case by case basis.
We believe live re indexing will improve the user experience for our clients, especially those clients, whose matters tend to last for multiple years on our platform.
All the sales and marketing side Q1 was a productive quarter. The highlight of the quarter was strong with funnel activity on an aggregate and per rep basis.
Across our measures such as meetings near term opportunities and wins, we have been seeing acceleration since the start of the year.
This is telling us that the operational initiatives, we have been implementing internally and that we discussed on the last earnings call are starting to drive results.
Improving pipeline metrics demonstrate the success of that effort.
While we are pleased with the continued improvement in pipeline metrics and the resulting growth in total customers. We continue to see less usage of our platform at very large matters across all our products.
Additionally, we continue to see pressure from our largest customers to reduce their spend on our platform by reducing the amount of data in our platform more aggressively utilizing lower cost disco offerings like disco ECA and renegotiating total spend.
Given our usage based business model. This pressure on usage levels can mean that revenue does not grow in line with the improvement we are seeing in the pipeline metrics that we more directly control.
We can sell lots of new customers and add lots of new matters without necessarily seeing that increase in usage that would drive revenue growth.
Over time, we believe this will result in increased usage and consequently increased revenue.
In Q1, we launched our law better marketing campaign.
Law better announce to the world. The disco is here to make the law work better for everyone.
We launched our digital streaming services with full length commercials as well as the targeted digital blips on social media.
<unk>, even seen our Lady Justice or Lady Jay on your own television. If you have not you should look up our response.
Our customers and new prospects have been very positive about this campaign.
We are seeing a high engagement with our content across all media channels.
On our website visitors are spending 15 times more time, what our cab paint pages versus site wide averages.
We're seeing engagement with some of the largest legal buyers in the world having to our website exploring our products and reaching out for conversations.
Both Cecilia at law better were on full display at legal week in New York. This past March where we saw strong attendance at <unk> with our team at lead generation.
One lawyer at the show told us that what he saw the law better campaign on television. He brought his entire family in to watch, it's not often lawyers receive marketing attention.
We are pleased with the excitement our campaign has generated among our customers and prospects.
Finally, operationally, we're continuing our push to globalize with the opening of our new office in Delhi.
Through our India presence, we will be able to provide $24 seven customer service and support to our customers worldwide and continue to scale out other business functions, including engineering.
This team will augment our existing team of discussions in North America, and Europe and will be a tailwind on our path to profitability with that I will turn it over to Michael.
<unk> in Q1, 2023 revenue was $33 1 million.
Klein of 4% year every year the year over year decline in the quarter is attributable to the smaller matters. We saw in the review business 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.
Our gross margin in Q1 was 76% up from 74% in Q1 of the prior year as we mentioned before our gross margins fluctuate from period to period based on the nature of our customers' usage for example, the amount and types of data ingested and managed on our platform we expect.
Gross margin to continue to be within the bands we have historically seen salesman.
Sales and marketing expense for Q1 was $17 5 million or 53% of revenue compared to 45% of revenue in Q1 of the prior year. This represents an increase of approximately $1 9 million in the quarter year on year. The increase was driven by our head count investments in 2022 as well as our marketing.
<unk> launched in Q1 research and development expense for Q1 was $13 1 million or 39% of revenue compared to 32% of revenue in Q1 of the prior year. This represents an increase of approximately $2 2 million in the quarter year on year. This growth was driven primarily by our.
Engineering head count investments in 2022 general and administrative expense in Q1 was $8 6 million or 26% of revenue compared to 22% of revenue in Q1 of the prior year. This represents an increase of every zero point $8 million in the quarter year on year operating loss.
Q1 was $14 million, representing a margin of negative 42% compared to negative 25% in Q1 of the prior year adjusted EBITDA was negative $13 million in Q1, a margin of negative 39% compared to a margin of negative 23% in Q1 of the prior.
<unk> net loss in Q1 was $12 1 million or negative <unk>, 37% of revenue compared to a net loss of $8 6 million or a negative 25% of revenue in Q1 of the prior year net loss per share for Q1 was <unk> 20 per share compared to <unk> 15 per share.
In Q1 of the prior year.
Turning to the balance sheet and cash flow statement. We ended Q1 with $187 6 million in cash and cash equivalents operating cash flow for Q1 was negative $14 8 million compared to negative $11 4 million in the prior year on May nine we took cost cutting actions that impacted.
The number of employees across all departments. These changes are reflected in the new adjusted EBITDA guidance.
We're about to provide now turning to the outlook for Q2 2023, we are providing revenue guidance in the range of 31 million to $33 million and adjusted EBITDA guidance in the range of negative $12 million to negative $10 million for fiscal year 2023, we are reiterating our prior revenue guidance.
$135 million $245 million and raising our adjusted EBITDA guidance from a range of negative 42 million to $38 million to a range of negative $40 million to negative $36 million. We are continuing to target Q4, 2023, adjusted EBITDA margin and the negative teens.
Additionally, we are pulling forward the anticipated timeline of our path to profitability by one quarter. We had previously shared that we expect to be adjusted EBITDA positive exiting 2024, we now expect to be adjusted EBITDA positive in Q3 of 2024, now I would like to turn the call over to the operator.
Her to open up the line for Q&A operator.
Thank you we will now begin the question and answer session. If you have a question. Please press star one on your telephone keypad and if you wish to remove yourself from the queue simply press star one again.
Your first question comes from the line of Koji Ikeda with Bank of America. Please go ahead.
Yeah, Hey, guys. Thanks for taking the questions.
Maybe a question for <unk> or Mike.
It should really focus on this AI opportunity here and thank you for all the color on where you guys might be gone, but my question here is really about how to think about celiac and these other AI tools the future AI towards that Youre talking about its potential Tam expander.
The question is around AI tools, it should drive the efficiency of the end market and.
Lead to maybe thinking that it could result in less data that needs to be adjusted onto the platform. So really just trying to understand the implications of how you think about these AI tools in the Tam.
It's a great question I think we're in early days of thinking about what the technology is going to do two different categories of spend there are no doubt areas, where the use of AI will be deflationary for example in our core review business Indeed, the AI.
But we've baked into our products over the last eight years has already been deflationary in the review of business, which is what allows us to deliver such material savings on a guaranteed basis to customers, who switch from doing review using brute force armies of associates to AI powered review.
Using discrete review.
If we go forward and think about the four categories of AI.
I use that I talked about one is question answering that says here is an example of another as document analysis, Sarah just drafting and document generation and for US as a natural language interface to the products I think you will see a mix of both taking existing categories of legal work and.
<unk> spend on them by making them more efficient, but you will also see an expansion of the market for legal services, because there will be an expansion of what is possible using these AI technologies to give you a very simple example think about compliance right every large bank every large pharmaceutical.
Company every large defense contractor any company that does a lot of M&A is faced with the issue of knowing whether or not there is problematic communication happening in email in documents and slack and Bloomberg chat right and the traditional approach of doing audits and having.
Lawyers review samples of those documents can be replaced by an AI powered system that is able not only to review those documents, but ideally provide actionable feedback at minimum to the legal department and the compliance department, but eventually possibly with the supervision of lawyers to the actual.
Humans, who are creating that communication in the first place. That's just one example of many that I could give but I think we will see with the rise of AI, what we've seen with the rise of other technologies that its deflationary in some areas while at the same time, creating many more opportunities to use technology to.
Create value for clients.
Got it no. Thank you for that and just a follow up here if I may for the Michael in your prepared remarks, you mentioned in early May there was some adjustments in the operation that's leading to the.
Higher adjusted EBITDA outlook could you could you dig into that a little bit more fleet well so.
The higher adjusted EBITDA.
Well it can also pulling forward our adjusted EBITDA from exiting 2020 forward to Q3 of 2024 is related to but not exclusively related to our may 9th we committed to a plan to reduce our workforce.
Representing about 47 employees and roughly 8% of our current global workforce Youll see more details about this in the queue.
But that's really related to pulling our guidance.
Okay.
Got it. Thank you. Thank you so much.
Your next question comes from the line of Tyler Radke with Citigroup. Please go ahead.
Hi. This is Kelly till then on for Tyler Radke, and I just wanted to kind of piggyback on that last question.
Kiwi with respect to those AI category that you spoke about in the prepared remarks, which of these functionalities that you're paying customers specifically asked for the most and as you guys look at your monetization strategy, which of these categories. Do you think provides the biggest opportunity.
Revenue uplift.
I think we're in an interesting moment, where virtually every customer has been exposed to things like chat GPT and many customers who have been exposed to things like mid journey and so you ask customers where does your mind go to in terms of churn redo AI.
And you will get either my category widen or by category III. So youll get either question answering or document generation, but I think there are opportunities to build really amazing products and consequently, really amazing businesses in all four of the categories that I talked about and I'll spend time, I think focusing on the <unk>.
First one because that's where we have product experiences that we've put in front of customers and that of course is cecilia.
Do you think about what Cecilia lets customers do it lets them ask questions in natural language and get back narrative answers in huge collections of private data are a demonstration of this technology happens in the database populated with Enron emails and documents and you can ask questions like what was that.
Runs business in California, or even ultimate questions like did add Ron commit accounting fraud, you can follow up on those questions in natural language and I think importantly for the legal use case, you can get back citations to documents in the database that support the narrative answer so that allows law.
Layers to get comfort that the answer is not a hallucination because they can go directly to the documents and those documents can be the basis for further investigation in Cecilia or again importantly in the rest of our platform. So one advantage of having not just the AI capabilities, but baking them into <unk>.
Our platform is that after engaging in that Q&A with Cecilia. The lawyer can then learn from the documents that these other category of evidence was important pull adapt using search visualization collected from the client make the production to the regulator at the court. So Laurie can seamlessly transition to deposition testimony.
And so it's the power not just of a standalone AI feature, but incorporating those AI capabilities into our platform where lawyers are already doing their work I think in the near term as Cecilia is the product that is closest to G. And we do think it will be a material to customers.
And we look forward to following it up with a fast sequence of releases across the other areas that I talked about.
Thanks, very much that's really helpful and maybe one for Michael.
<unk> guidance. It assumes continued year over year revenue declines, but the full year implies acceleration in the business over the last few quarters. So how are you thinking about the back half of the year end and what kind of uplift are you anticipating.
From the celiac or any of these new AI capabilities are they going to show up in FY2023.
Potentially shopping and slide 24, thank you.
So Cecilia and these kind of newer technologies are not baked into our guidance for 2023 I do believe that technology is incredibly amazing and I'll, just mentioned that I'm old enough to be in the room that I recall pack in the dotcom or many of the companies that were very successful that we all know of where startups and one of the.
Things that I think is most exciting about <unk> is the fact that we have the data on our platform and I think we and others in our position where we have the data other companies in other industries can leverage this new technology and basically build on what we've been doing for years, we've been doing AI for years and Cecilia I do believe is going to be incredibly helpful for us and our.
Clients in terms of the guidance.
For the back half of the year. It does obviously require a reacceleration of our revenue.
We are seeing in the pipeline and the funnel some positive signs.
And there is our expectation and optimism that thats going to turn into re acceleration of the revenue and so we are optimistic on where we're going to end the year.
Your next question comes from the line of Jackson Ader with SBB. Please go ahead.
The first one is on <unk> your commentary on the large customers and larger matters.
Juicing their usage and.
Their spend with you.
Are they reducing the usage and going to other providers that may be have more of a legal flavor.
Flavor to them.
Or are there just not a level of activity or the level of matters, maybe existed a year or two ago.
No I'm sure there may be a handful of exceptions, but what I'm talking about is not large customers defecting to the competition. It's just large customers reducing their usage on our platform and to give you a sense of what I mean, there are things you can do on the margin if any case that with <unk>.
Increase or decrease your usage of our platform. For example, if you are not closely managing the bottom line you might just collect lots of data broadly from lots of witnesses toss it into the platform you get to the review when you get to the review once you've conducted the review you leave all the data up there.
As you go through the downstream parts of litigation like Depositions motions for summary judgment trial, you might even leaves the data up during dependency of the appeal.
Not that you arent doing anything with it but you are coming in there occasionally over the course of sometimes a multi year period as the litigation unfolds. So that was true for many of our large customers for many years call. It for 10 years.
What we've been seeing lately is as some of these legal departments come under pressure to provide cost savings as part of broader company focus on profitability.
For our large customers discuss line item can be material to them and so it occurs to them to see what they can do to reduce the total cost of their disco usage and so what they can do is trim various parts of that workflow that I talked about instead of collecting data from every witness advantage.
Imaginable, maybe we can collect data from fewer witnesses instead of loading. It immediately maybe we can wait a month or two and loaded closer to the discovery deadline instead of leaving it up there maybe we can call. It down so that we leave only the most relevant parts up there and to archive the rest in a way where it can be.
Stored but isn't consuming active usage in disco and maybe when the case is resolved rather than keep the data around because there is a prospect for follow unrelated litigation, maybe we take it down and we'll simply re Ltd. Later, if we need to.
Another piece that I talked about in my prepared remarks is of course, the use of disco ECA early case assessment, which is a set of capabilities that allows customers to load large volumes of data at a lower price point explore and prioritize that data using tools like <unk>.
Asian, and then promote data out of disco ECA into active review at a higher price point, we've seen an uptick in usage of disco ECA again, we think thats a phenomenon of customers, especially large customers being a little bit more careful about their volume of usage on our platform.
Okay, Alright, thank you that was thorough.
Michael any.
Kind of.
Functional detail <unk>.
Can provide on the 47.
People in the workforce reduction.
Sales are.
R&D is something like that.
It was across all departments.
Okay. Okay got it thank you.
Your next question comes from the line of Derrick Wood with TD Cowen. Please go ahead.
Great. Thanks for taking my questions nice job on the rebound in new customers I guess looking back to Q4, what do you think caused that blip.
Give us a sense for what average deal sizes for new customers are trending versus maybe what it look last year.
Looked like last year, and then just I guess.
As you look at new customer generation looking forward.
Sounds like you have good healthy pipelines being built do you see any.
Kind of behavior, where people are investigating chat GPT are there new startups that.
Are talking about.
Generative AI capabilities and potential for a longer sales cycle, given what's going on with <unk> right now.
Sure so on customer account.
We are delighted by the rebound to what has been sort of more historical rate of new customer additions in the quarter I don't think theres really anything magical to it if you break it apart into its components what strengthened is.
As churn rates, so the activations improved quarter over quarter.
Contributing to the higher net add number which is of course positive.
<unk> to both of your questions. When we think about customers in their first year. Some of these numbers can be a little bit complicated because until a customer gets two phase III active matters are six active matters, it's possible for the customer to add a matter. We have two matters and then touching zero at sea.
Point before coming back so you have some of that bouncing around in the numbers. It also complicates thinking about what is the average deal size because when you sign up the customer they simply sign a contract that has a unit pricing and then the size of that deal will be determined by how much data is involved.
In the first case or a couple of cases that they put on the <unk> platform, but zooming out a little bit kind of in the aggregate think about customers starting out in the middle sized figures kind of spend and then growing overtime to low six figures Midland Upper six figures and then our biggest.
Customers winding up in the low seven figures and again that journey historically took sort of three to five years in more recent times, sometimes that journey has been accelerated for logos, especially when there is a repeat buyer at the logo, meaning someone who went through a disco adoption journey at a prior company.
Switches companies and then adopt <unk> at the New company I don't think we've seen any material trend in terms of the size of first year spec.
Okay and just the follow up on the second question around.
How often is chat GPT coming into conversations.
Thank you mentioned that every.
Every customer is aware, but now every company has remained.
Yes.
Is that creating some.
Part of the sales cycle in our conversation and are there any different vendors showing up in deal cycles.
So far it's been an accelerator.
We're of course delighted to be able to announce seeley. Our question answering surface E discovery at legal week, a couple of months ago.
March we had tremendous reaction at the show we.
We had a big event at the end of one of the days, where we had hundreds of people come in and did a live unveiling of course lots of one on one meetings following up with customers then and law.
Lots of interest from customers in the months that have solid so tremendous demand. There I think it's been a door opener both for customers, new and existing who are interested in <unk>, but also it's just an opportunity to go talk about the rest of the <unk> product portfolio.
So our form of lead generation and we haven't seen I think much change in E discovery in the competitive set based on GPT so far.
And we've seen even less impact in our other product areas.
But if I were a predicting person.
I'd say that we will see competition, both from incumbents and presumably from startups.
In both E discovery and review likely first and we will see other AI applications in other areas in terms of facing that competition.
I think this goes in a very good position because of course, we've been doing AI for eight years now and as Michael pointed out we have the advantage of having access not only to a large collection of private data that is very hard for other people to obtain but also lawyers are doing their work in our platform and so.
We get lots of what we used to call training data its observations of how lawyers interact with label and annotate the data in our platform all of which can be used to train. These models I think another thing that you are seeing with some of these AI releases is how they are compounding so the company that released.
As the first grade chatbot gets not only market share, but they also get all the signal that comes from people interacting what questions are they asking what follow ups do they ask questions do they like or dislike and so we think thats another benefit of being early to market with products like celiac.
Only grabbing share early on but also grabbing an unfair share of the training data that can be used to power a subsequent AI releases.
Great. Thank you all excited to see the new product come to market later this year. Thanks.
Your next question comes from the line the line of Arvind <unk> with Piper Sandler. Please go ahead.
Hi, yes, thanks for taking my question.
I wanted to kind of just go back to kind of the review of business right.
Any update.
On that I know I know.
There was a fairly volatile.
Uh huh.
Is that kind of stabilized and what's your kind of outlook on the review of business.
I do have a cautious update to share about the review business. So first finally, it is up quarter over quarter, which is good although modestly second yes. This is a quarter, where so not only are all the big ticket review is gone, but the tail of all those big ticket reviews.
Got it completely out of the number and then additionally.
We talked about improvement in the pipeline metrics that we look at so how many opportunities are there how many wins are there what are the win rates and so on.
And I can tell you given where we are today, we are seeing finally, an uptick in the review business.
I want to pair that optimism with caution we will report on Q2 results. When we report on Q2 results.
But I think two good facts are it seems like we're back into a state of growth in that business and all of the big ticket items and their tails are fully out.
Terrific and then.
You certainly can provide a lot of.
Good color in your prepared remarks.
The last Q&A on on AI.
I didn't want to kind of.
Think about it.
How should we think about it right I mean, there's one part one way of looking at this and saying they can't.
Cecilia.
And AI.
Driven company from the beginning.
And this is not like the fact that you're chasing rate. So so it feels like.
Our unique position to take advantage of this broader development in AI technology.
But on the other hand, what you also mentioned that as part of Q&A is like there is going to be these.
Incumbents.
Like startups or other companies kind of.
That have been in the business kind of really sharpening the product with AI.
Of course, you'll have you did you clarify you have yet.
Is that still like a mixed thing we have to see like.
Is it mixed yes mix for you all or do you really look at it as an opportunity or is there potential for being a threat as mills.
I think AI is clearly an opportunity and I can tell you. It's not just the product things, but it's I'm not sure. If I put this in my prepared remarks, but for me I have not been as excited about any fundamental technology advanced since the mid <unk>.
Web, which as you know I was in school at the time, that's what convinced me to study computer science.
Hum.
We talked a bit about how we're going to bake. Some of these AI technologies into the products I can also share with you that throughout disco internally, we have launched an aggressive campaign to take every part of our business and to use AI everything from drafting communications and internal documents to we've trained.
Internal chat bots across the entire knowledge base and ticket responses. So that we're able to give people first drafts of what they should be saying to customers and answer internal questions about how our products and systems work and I think that's just the beginning so I think AI is a huge opportunity.
I do think you're right, though that part of AI being such a huge opportunity is that there are large categories of legal work, including some of the work that we either accelerate or do.
That are going to be largely automated as AI is a better product ties and becomes even more effective to give you. An example, I don't believe that in 10 years, there will be a lot of lawyers reading documents that is going to be obsolete it using AI.
I would of course believes the discos in the best position to do that Obsoleting and so the way I might phrase. This I think we're a little bit like Netflix win.
Flix made the shift from Dvds in the mail to streaming.
We're well positioned to go take advantage of this opportunity, but if we did not take advantage of this opportunity that I think our prospects would be great.
Perfect. Thanks for clarifying that really appreciate it.
Your next question comes from the line of Brent Thill with Jefferies. Please go ahead.
Hi, this is loves soda on footprint too.
Thank you <unk> and Michael for taking my questions.
Maybe first for <unk> I know in your prepared remarks, you talked a little bit about the fact that revenue might not grow in line with the pipeline improvement that you've seen I.
I guess going forward is this more of a near term trend or should we expect this to be more of a longer term trend.
If it is a near term trend and what gives you confidence.
It will rebound more in the longer term.
So.
The only thing I can do is to report on what we're seeing in the market as we see it and what I tried to convey in my prepared remarks is what we are hearing from our largest customers and its theres nothing fancy about it is we are at companies.
We're suddenly profitability and EBITDA matters, a lot more and we've received just like every other department to mandate from finance, saying, we would like you to cut budgets by X percent and web disco is a small line item, sometimes that mandate misses us right, but when disco is a big line items.
As it is at our largest clients than the client calls us and says Hey, we have received this mandate from finance how can we help how can you help rather and our first response to them is always that the way to reduce legal spend is to buy more disco and sometimes that works it really does.
In other times, we get further along of that conversation and we start either negotiating total spend.
Or thinking about ways that usage can be reduced and in that discussion with our large clients. We tried to ensure there is something for both sides. So it may be we helped the client achieve.
<unk> ability or cost cutting goals in the near term in exchange for longer term commitments or.
An agreement to rollout a brother swaths of Cisco products.
Those kinds of conversations from our largest clients, we're simply not conversations that we were having during the 10 plus years in our history of economic boom times. They do present, a headwind to growth in terms of whether they will continue I don't have anything.
Special to add other than you know.
I have faith in the U S economy in the world economy and at some point, we won't be in such an.
Grimly perceived economic times and when that happens I don't expect that there will be any fundamental change in the trends that show increased exposure to legal issues for companies operating around the world and increased volumes of data because of the rise.
Not only email and documents, but also a application data things like chat streams application data like <unk> slack Salesforce video audio and so on so I guess, what I'm, saying is I'm a believer in those same long term trends as opposed to some questions we have.
Seem to be getting from customers.
That are driven by a short term desire to improve profitability.
Got it perfect.
One quick follow up for Mike Michael If I may just a good question on.
Given the beat this quarter and youre not flowing through the beat into the full year guide again, and the fact that com, so keep getting easier sequentially could you just.
Give us some color into what's being baked into the guidance for the full year. Thank you.
Yes. So we are in terms of the back half of the year.
Obviously, it does require a reacceleration of the revenue, we do look at and as Kieran mentioned.
At our metrics every week every day and our pipeline review metrics, our funnel metrics and we are seeing positive signs we have seen some positive signs that we believe will lead to.
The revenue growth in the Reacceleration of the revenue that we need to hit our numbers for the full year.
Got it but just to be clear.
Aching in more conservatism now than you did say three months ago.
No.
Okay. Thank you.
Your next question comes from the line of Scott Berg with Needham. Please go ahead.
Hi, This is Rob <unk> on for Scott Thanks for taking the question.
Youre, saying it might be too early to have a concrete answer here, but last quarter, you mentioned, a push towards corporate versus selling into law firms do you have any insight into your that pushing you'll how it has fared so far okay I understand thank you.
Yes, that's terrific that's a shining point I think for a disco we've shared some numbers in our annual earnings calls at the last earnings call about the total number of corporate direct logos and I believe we also shared the growth of that on a year on year basis, which exceeded overall.
Logo growth substantially. So this has been a strategy of ours.
Over the long term and it is of course since the beginning the dollars that have flowed into disco as revenue has always come from the budgets of corporate legal departments, but earlier in our journey as a company we were much more dependent on law firms as a channel to go reach the ultimate <unk>.
Maker in the legal department of large enterprises and as the company has grown and especially following our IPO I think we've been viewed by many of those customers is a more credible partner to work with directly and perhaps the partner that they have more confidence will be around for the long haul in any event whatever the reason.
We've seen substantial success in being able to forge those relationships directly.
We have a constituted enterprise sales group that is maniacally focused on growing and forming new corporate direct relationships. We think it is very much part of the future.
Got it. Thank you and then your understanding Cecilia has not moved into the updated guidance as you look across your product portfolio, what sales or use of modules are you anticipating will drive the revenue growth acceleration that's implied in your updated guidance.
Well or two.
Our original product discovery discovery still represents the vast vast majority of revenue and so growth in that product line is.
The Lions share of overall growth I think we are having growing optimism about review.
<unk> growth.
Although again you have to let all of the comps roll off in this quarter Q1 is the first quarter, where all of the Big ticket review edits tail has fully dropped out. So I do think review can be a contributor and then the newer products, we think can be material percentage contributor to growth.
But because of the scale of those businesses, they're not likely to be.
Movers. So overall top line growth So E discovery review and Adonis sugar and everything else.
Got it thank you.
Your next question comes from the line of Parker Lane with Stifel. Please go ahead.
Hi, This is Matthew on for Parker, Thanks for taking my questions.
To touch on the New office you opened in India.
Kind of incremental impact do you think the <unk>.
Offering 24, southern customers core we'll be able to give you some.
How quickly do you believe Youll see return on this investment and do you foresee any other international growth this year.
We're very excited about the launch of the Delhi office and we're treating it many companies see in aerospace and of course in many spaces have treated their India presences.
Low cost expansion.
We tried to avoid is offshoring, we don't think about the Delhi office that way. We think there is the same caliber of talent available to Delhi as there is in London, and New York and over time, we intend to build the Delhi office into a full fledged office across essentially every department.
If our business and we've made great strides.
Towards accomplishing that already and intend to continue growing that office over the course of the year I think one of our learnings from the experience during COVID-19.
Ben that we really like remote work, but it has been that we can have these multiple centers of excellence in a kind of a global Nexus of talent, Austin, and New York, London, and then Kelly.
That's how we think about it we think that globalization gets us access to better talent and obviously also has the effect of improving our profitability profile, we have nothing else to announce on the globalization front right now, but I think we are open to the idea.
Announcing similar expansion in the future some of that of course will depend on the overall rate of head count expansion.
The business in terms of 24 seven support.
We've always provided 24 seven support but probably deli makes the lives of the Americans a little bit better since they don't have to stay up at night.
Got it thanks for the color that's all for me. Thank.
Thank you.
Your next question comes from the line of David Hynes with Canaccord Genuity. Please go ahead.
Hey, Thanks, guys. So can we look in your answer to both Jacksons and loves questions you talked about how and why our core ediscovery customer may be looking to trim their spend but I think when you put a comment out there without any quantification is going to make investors nervous right. So is there any way you can put some bands around.
The magnitude of trimming that Youre seeing I mean is it 5% is it 10% is it more or less like anything.
Help us think about how that impacts the numbers would be super helpful.
We will take that as good feedback we don't have anything for you now.
I can give you not in the aggregate, but I'm involved in most of these conversations I can sort of anecdotally share with you.
Sometimes it can be a little bit you have to disambiguate, just the ordinary ups and downs of usage and then these sort of keep usage.
Keep the legal matters fixed Tibet.
<unk> the amount of usage of statistical platform on those legal matters again don't hold us to these exact numbers, but sort of color wise.
I would put it in the kind of.
10, 15% ish range for a big customer, but I want to wrap that in all the disclaimers that can be given thats purely anecdotal.
Understood. Okay, and then Michael will follow up for you. So.
The guidance implies that Opex goes down in Q2, I presume based on the timing of the restructuring you talked about today.
That's probably goes down a little bit more in Q3 from there like what kind of Opex growth are you embedding any assumption that you can get to breakeven by Q3 of 24 like this opex is just kind of stay flat at that Q3 level or how are you thinking about it I mean, there. So there is I mean, we've talked about this before theres four levers to scatter.
Getting to path to profitability I will tell you that we're very committed to the path to profitability and in my prepared remarks, we talked about where we expect EBITDA will be in Q4 of this year. We also provided color on the full year.
Adjusted EBITDA numbers that were targeting and also hitting adjusted EBITDA positive in Q3, there's four ways to get there. One is revenue growth two is cogs optimization, and how we kind of work with AWS and the other vendors that hit Cogs and also obviously the below the line AWS cost.
There is non staff costs, just like we have some customers that we talked about who are approaching us to.
Our overall globalization effort and the New Delhi office is obviously.
Part of our plan. So there is there's a big mix in how we're going to get there, but I will tell you we're very committed to getting there.
Okay sounds good thank you guys.
And your final question comes from the line of Mark Scheffel with loop capital markets. Please go ahead.
Hi, Thank you for thank you for taking my question just going back to Sue I was wondering if you talked a lot about just say from a product perspective, just wondering if you could talk about it from a go to market approach or maybe just talk a little bit about some of the activities that you have planned or youre currently undergoing with respect to your sales force to bring them up to speed.
On the new products and capabilities.
Sure, Let me talk about it a couple of different levels to first company wide the disco.
Kick us off with an all had some time ago announcing not only our intent to bake. These modern AI technologies into our products, but as I talked a bit about our intent to bake. These modern AI technologies into the way we work in every part of our company. So there is an ongoing campaign of education.
<unk>, so that you can pick and STR at Cisco or someone working in business intelligence or someone working in engineering and Aspen, what's going on with large language models and whats and embedding them. So they can tell you that and they can tell you how those technologies can be applied to make their and their colleagues work more efficient so at the biggest picture.
Level, that's going on in terms of the rollout we've synchronized the announcement with legal week. This year a couple of months ago at legal week, we did a series of invitation based suite meetings as well as a big part D, where we did public demo as well as hourly demonstrations.
Since then we've done a series of meetings with prospects and select new customers, where we give them the opportunity to learn about the technology and to play with the product directly right. So to ask questions of Cecilia directly gauged the answers form a view about how applicable would be to their practice.
<unk> also done Webinars styles presentations to broader audiences and next week, we'll be at clock legal operations conference one of the larger conferences in the space. So there is that kind of awareness building and frankly demand to building going on in the field. We have also.
<unk> the sales team and the solutions architect team to be able to have these conversations with clients and we've been able at the number of our partners to amplify the messaging.
Cecilia as we get closer well theres going to be a phased rollout where we're going to expose.
Our largest existing clients to cecilia, allowing them to use it on their own matters and collecting important early feedback and then that will be followed by general availability. We are still working on the commercial terms that will surround general availability and we'll have more to announce as we get closer to that.
Yeah.
Great. Thank you that's all from me.
There are no further questions at this time I will turn the call Jay Kiwi camera co founder and CEO for closing remarks.
Thank you for joining us today and thank you for your interest in <unk>.
This concludes today's conference call you may now disconnect your lines.
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Okay.
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