Q1 2025 CS Disco Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to CS Disco's first quarter of fiscal year 2025 conference call. At this time all participants are in a listen only mode.
All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. Thank you.
If you'd like to ask a question during this time, simply press star, followed by the number 1 on your telephone keypad.
If you would like to withdraw your question, press star 1. I would now like to hand the conference over to your first speaker today, head of investor relations, Alexei Lakchakov. Please go ahead.
Good afternoon, and thank you for joining us on today's conference call to discuss the financial results for Disco's first quarter of fiscal year 2025.
Speaker Change: With me on today's call, Eric Friedrichsen, Disco's Chief Executive Officer, and Michael Lafair, Disco's Chief Financial Officer.
Speaker Change: Today's call will include forward-looking statements within the meaning of the safe harbor provisions of the private security litigation reformat of 1995.
Speaker Change: Including but not limited to statements regarding a financial outlook of future performance, our future capital expenditures, market opportunity, market position, product and go-to-market strategies, and growth opportunities, and the benefits of our product offerings and developments in the legal technology industry.
Speaker Change: In addition to our prepared remarks, our earnings press release as key filings and a replay of today's call can be found on our investor relations website at ir.cs Disco.com
Speaker Change: Forwardly statements involve a 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.
Speaker Change: Forwarding statements represent our management's beliefs and assumptions only as of the date made.
Speaker Change: Information on factors that could affect the company's financial results is included in its filings with the SEC from time to time, including the section titled Risk Factors and the company's annual report on form 10K.
Speaker Change: for the year ended December 31, 2024, filed with the SEC on February 20, 2025, and the company's upcoming quarterly report in Form 10Q for the quarter-ended March 31, 2025.
Speaker Change: In addition, during today's call we will discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to a lot of subsidy for or superior to measures of financial performance prepared in accordance with gap.
Speaker Change: Threaten affiliations between gap and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their close to the gap equivalent is available in our earnings release. And with that, I'd like to turn the call over to Eric.
Eric Friedrichsen: Good afternoon everyone. I am pleased to report our first quarter of fiscal 2025 results and I'm encouraged by the progress and the traction that we're seeing across the business.
Software Revenue in Q1 was $30.9 million $30.
Antotal revenue in Q1 was $36.7 million.
Towards the High End of the Guidance Range.
Eric Friedrichsen: Adjusted EBITDA for Q1 was negative $5.1 million, or negative 14%, approximately $1 million above the high end of our guidance range.
Eric Friedrichsen: We finished a quarter with $118.8 million of cash and short-term investments and no debt.
Eric Friedrichsen: We ended Q1 with 318 customers who each contributed more than $100,000 in total revenue over the last 12 months.
Up 8% year-over-year [inaudible]
Eric Friedrichsen: We continue to see year-over-year growth in the number of customers spending more than $100,000 with us as well as the total revenue generated from these customers.
In all, these customers represent 76% of our revenue.
Eric Friedrichsen: We saw yet another quarter of growth in the revenue from large multi-terabyte matters.
Eric Friedrichsen: We believe this is a meaningful signal for us for a few reasons.
Eric Friedrichsen: First, it's an indicator for future revenue as large matters typically remain on the platform for longer.
Eric Friedrichsen: Second, Matters tend to expand over subsequent months, which supports further revenue expansion.
Eric Friedrichsen: And third, it reflects the go-to-market changes that we have made that are driving the right interactions with the right customers, resulting in more strategic matters, higher average data per matter.
an increased overall usage of our platform.
Eric Friedrichsen: While it's too soon to call this a trend, we are encouraged by these signals an optimistic that momentum will build in the quarters ahead.
Eric Friedrichsen: and we are seeing early signs that are more focused, strategic approach is starting to pay off.
Eric Friedrichsen: First, I'm going to highlight our focus on client services, changes in our go-to-market function in addition to our product suite.
This quarter, we launched our new customer value proposition.
with you in every case.
Eric Friedrichsen: With you in every case, captures the essence of how Disco is shaping the future of litigation.
Eric Friedrichsen: Our industry-leading platform equips legal teams with tools not previously available to the legal world.
Eric Friedrichsen: and when paired with our expert services team, we're enabling customers to tackle the most complex high-stake matters with confidence.
Eric Friedrichsen: But we haven't always been great at communicating our full value proposition to our customers.
We are changing that [inaudible]
Eric Friedrichsen: The essences behind with you in every case are embedded in our marketing, sales, products, and operations.
Eric Friedrichsen: Ensuring that our customers understand the full value of what Disco can offer them.
Eric Friedrichsen: We want customers of you Disco not just as a vendor, but as a true partner who is scalable, the liable and deeply attuned to the demands of every case.
Eric Friedrichsen: One great example of this partnership is the law firm, Munch Hart.
Eric Friedrichsen: In Q1, Munch renewed a 3-year subscription, doubling their commitment compared to their prior contract.
Eric Friedrichsen: They've been with us for years and have consistently expanded both the number of matters and the volume of data they manage on the Disco platform.
Eric Friedrichsen: This is exactly the kind of outcome that we're striving for through with you in every case.
Eric Friedrichsen: We earned their trust through the strength of our technology, and we've kept it through close collaboration, deep listening, and a relentless focus on delivering value at every stage in their journey.
Eric Friedrichsen: This renewal is the result of strong collaboration between our customer success and sales teams.
Eric Friedrichsen: It is a powerful example of how we combine our platform and our people to serve as a true partner in every case.
Eric Friedrichsen: and why we're confident in our ability to drive long-term, durable customer relationships.
Eric Friedrichsen: Moving to the overall progress we are making within our go-to market, last quarter we discussed our initiatives to enhance talent, to target accounts, and to align incentives.
Eric Friedrichsen: We made significant progress with each of these initiatives and the increase in revenue from larger customers and larger matters is a positive indicator that those efforts are beginning to take effect.
Eric Friedrichsen: We are also seeing nice growth in our Cecilia Generative AI suite, including Cecilia Q&A and Cecilia Auto Review.
Eric Friedrichsen: The number of our Cecilia Q&A customers grew five times from Q1 2024.
Eric Friedrichsen: We are happy with this trajectory and this capability as more customers are leveraging to sell you Q&A to drive superior outcomes for their customers.
Eric Friedrichsen: With AutoReview, we continue to see strong momentum as well. In Q2 of 2024, we announced that Cecilia AutoReview was demonstrating speeds of 3,800 documents per hour, over a 24-hour period, which is equivalent to a 140-person review team.
Eric Friedrichsen: Since then, we've continued to make big strides on even faster throughput and higher quality results that are potentially game-changing for our industry.
Eric Friedrichsen: Exciting that was especially clear at Legal Week in March, where I repeatedly heard how Cecilia and our broader e-discovery capabilities are ahead of the competition.
One standout example is a leading Amloff 50 firm.
Eric Friedrichsen: In a government investigation involving close to 3 million documents, this client leveraged to Soyuz Q&A and auto-review capabilities.
Eric Friedrichsen: to identify key facts and documents well ahead of critical deadlines.
enabling them to craft the optimal strategy for their clients.
Eric Friedrichsen: Working in close partnership with Disco, they used Cecilia to conduct a first-level Responsiveness Review and submit a production.
The result was fantastic.
Eric Friedrichsen: In 97% recall and 71% precision across nearly 200,000 documents, well within the accepted industry standards.
and they delivered at unprecedented speed.
Eric Friedrichsen: It's compelling proof of how AI and services can elevate legal outcomes.
Eric Friedrichsen: Although Cecilia Otto review revenue is still a small portion of our total revenue, we are optimistic about the future of this product.
Eric Friedrichsen: I continue to hear from our customers how they love our platform.
Eric Friedrichsen: Specifically, I've been hearing very positive feedback on the power of our AI and core search functionality.
The speed of our systems.
Eric Friedrichsen: The intuitive user interface, the security, and the rate with which we are releasing high performing new capabilities.
Eric Friedrichsen: Our customers' passion for Disco's platform and the continued execution from the Disco team gives me incredible optimism for the future.
Eric Friedrichsen: We are continuing to release capabilities that make life easier for our customers, enhancing both core e-discovery and to sell your related workflows.
Eric Friedrichsen: Recent launches include Cecilia Definitions, which enables users to generate on-demand definitions per selected text, accelerating comprehension and analysis.
Enhanced Cecilia Documents Scoping
Improved Document Navigation
Eric Friedrichsen: and expanded support for Slack and Apple documents and images along with many others.
These enhancements are not just about convenience [inaudible]
Eric Friedrichsen: We believe they are important to driving more large and complex matters to our platform.
Eric Friedrichsen: We are building tools legal professionals can rely on to handle the most demanding cases with speed and precision.
Eric Friedrichsen: Importantly, many of these innovations were directly informed by customer feedback.
Ultimately helping to deepen customer trust and increase wallet share.
Eric Friedrichsen: From a macro perspective, we have seen some external volatility over the past few months.
Eric Friedrichsen: The U.S. government administration's global tariff announcements sparked financial market instability and its recent executive orders targeting specific law firms have raised concerns in the legal industry.
I want to touch on these topics.
Eric Friedrichsen: First, regarding the recent legal industry conflict with the current administration, we stand firmly behind our customers and remain steady to support them however they need when they need.
Eric Friedrichsen: Second, in the context of broader macroeconomic concerns, we believe Disco is well positioned to weather a potential economic downturn.
Eric Friedrichsen: Our industry is unique in that it can experience both headwinds and tailwinds [inaudible]
During times of uncertainty.
Eric Friedrichsen: Historically, economic slowdowns have led to increases in litigation across several key areas where we have strengths.
Eric Friedrichsen: including bankruptcy, securities litigation, contract enforcement, insurance coverage, and regulatory investigations.
Eric Friedrichsen: While we believe we're in a strong position today, the strategic initiatives that we are driving with are existing customers to ensure that they are working with us on their large matters inherently helps us mitigate downturn risk even further.
Eric Friedrichsen: While the exact impact of the potential recessions uncertain, we remain optimistic that Disco's platform, which is designed to reduce costs, increase efficiency, and drive better outcomes.
Eric Friedrichsen: We'll continue to deliver strong value to our customers when it matters most.
Eric Friedrichsen: In summary, we're pleased with the progress we made in Q1.
Eric Friedrichsen: from continued revenue growth and improving customer engagement to continued innovation across our platform and AI capabilities.
I'm excited for the rest of 2025 and beyond.
Eric Friedrichsen: I want to take our customers, partners, and Disco employees for their continued trust and dedication.
Eric Friedrichsen: With that, I'll turn it over to Michael to walk through our financials in more detail.
Michael.
Eric Friedrichsen: of 2% year every year. In discussing the remainder of the income statement, please note that unless otherwise specified, all references to our gross margin, operating expenses, and
Jesse Ebidah is also a non-GAF financial measure.
Eric Friedrichsen: Our Gross Margin in Q1 was 75%. As we mentioned before, our Gross Margin fluctuates from period to period, based on the nature of our customer's usage, for example, the amount and types of data ingested and managed on our platform.
Eric Friedrichsen: 1,000 marketing expense for Q1, the 13.2 million, the 36% of revenue compared to 41% of revenue in Q1 of the prior year. The year every year decline is predominantly due to head count changes.
Eric Friedrichsen: Research and development expense for Q1 was $12.2 million for 33% of revenue compared to 28% of revenue in Q1 for the prior year. This increase was primarily driven by an increase in research and development personnel.
Eric Friedrichsen: General and administrative expense in Q1 was $8.4 million for 23% of revenue compared to 25% of revenue in Q1 of the prior year. General and administrative expenses were relatively glad you're over the year.
Eric Friedrichsen: Operating lots in Q1 was $6.2 million, representing an operating margin of negative 17%, compared to negative 18% in Q1 of the prior year.
Eric Friedrichsen: Adjusted EBITDA was negative 5.1 million in Q1, representing an adjusted EBITDA margin of negative 14% compared to an adjusted EBITDA margin of negative 15% in Q1 of the prior year.
Eric Friedrichsen: Netloss in Q1 was 4.9 million or negative 14% of revenue compared to a net loss of 4.7 million or negative 13% of revenue in Q1 of the prior year. Netloss per share for Q1 was 8 cents.
Glad, compared to Q1 of the prior year.
Turning to the balance sheet and cash flow statement.
Eric Friedrichsen: We ended Q-1 with 118.8 million in cash and short-term investments in no debt. Operating cash flow in Q-1 was negative 10.5 million compared to negative 7.3 million in Q-1 of the prior year.
Turning to the outlook.
Eric Friedrichsen: For Q2 2025, we are providing total revenue guidance in the range of 36.5 million to 38.5 million and software revenue guidance in the range of 31.25 million to 32.25 million. We expect adjusted EBITDA to be in the range of negative 5.5 million to negative 3.5 million.
Eric Friedrichsen: For fiscal year 2025, we are providing total revenue guidance in the range of 146,258 million and software revenue guidance in the range of 125.5 million, 231.5 million.
Eric Friedrichsen: We expect adjustity but out to be in the range of negative 18 million to negative 15 million.
Eric Friedrichsen: This represents an increase in our fiscal year 2025 software revenue, total revenue, and a subsidy but I'll look from what we guided last quarter. Now I'd like to turn the call over to the operator to open up the line for Q&A operator.
Speaker Change: Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one in your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again.
Speaker Change: And your first question comes from a line of David Hines from Canacorn Genuity. Your line is open.
Hey, thank you guys.
David Hines: Eric, it's been a little over a year since you took the reins of the CEO at Disco. I can appreciate the first 12 to 18 months are about getting internal ops where you want them. Obviously, a lot of time it's been spent on better aligning the go-to-market motion towards those higher value accounts.
David Hines: that you referenced. What's the plan for the next 12 to 18 months? What are you focused on to drive faster growths in the business?
David Hines: Yeah, thanks David. It's been a year. I just celebrated my one year anniversary last week and I got to tell you it's just flown by. You know, when I came to Disco, I had a thesis that there was a tremendous opportunity for us to accelerate our growth and to get to sustainable profitability.
David Hines: It started based on the fact that I knew we had a great set of products.
David Hines: a set of raving fan customers and a really passionate and talented employee base.
David Hines: But it also was clear that there were some problems that we needed to tackle and these were problems that I felt like I could really help with because I tackled them in the past. That was enhancing our culture, improving our operational effectiveness. [inaudible]
David Hines: and revamping our go-to-market. And so, you know, we made incredible strides so far. We've got the best employee engagement scores and the history of the company. [inaudible]
David Hines: We initiated really fundamental changes to how we measure and operate the business.
David Hines: and we rolled out critical changes to our go-to market, as you mentioned, aligning the majority of our resources to our best accounts.
David Hines: Getting into focus on increasing our wallet share within those accounts, building out our customer success teams.
David Hines: re-aligning the rules for our salespeople and our customer success people and changing the comp plan for our salespeople to really incentivize them to sell so that we could have a much more deliberate approach.
to helping our customers with those strategic and larger matters.
David Hines: And we started to see the grain shoots from that, as we mentioned some of them in our prepared remarks.
David Hines: But the reality is, we're just getting started. Most of the things that we, that I mentioned that we have implemented, either we implemented a couple quarters ago, or many of them we implemented in January of this year. And right now it's about executing.
David Hines: on our strategy. I'm confident that we've got incredible opportunity because we've got the right strategy. We're all aligned on that strategy.
We've got fantastic people, great products.
David Hines: and we've got people who can see the future and they want to be part of it. And so, right now it's about execution. We need to stay on point, we have hard work ahead of us, but we need to stay on point, we need to stay focused and we have to execute at a high level on the strategy that we've already initiated.
David Hines: So I'm excited about your two, then about your one, but your one's been great.
Speaker Change: Good, okay. And then I want to ask about the new tagline, right? I mean, you know, sometimes these things are marketing collateral, but the, you know, the with you in every case, right? And the promotion of full disco capabilities.
Speaker Change: Some clear to me, like, is that a nod towards wrapping more services around the software or what exactly are you trying to accomplish with that kind of positioning of the business?
Speaker Change: Yeah, you know, what are they? I think you probably know what I've met with.
Speaker Change: Oh gosh, almost close to 100 customers now face to face over the last year.
and it's remarkable how consistent I heard from them that...
Speaker Change: They love our products and when they would start digging in with them with the types of matters that they use our products for in some of the cases they use our products for all of their matters.
Speaker Change: But in other cases, they really think of Disco as a self-service solution. We're so easy to use. We're so fast. Attorney can get in and use the system themselves But for some of their larger, more strategic matters.
Speaker Change: and so a strength of ours is the fact that we're so easy to use, we're fast, we can be self-service. But sometimes they want more than that, and we've got great services, we always have, or at least have for the last few years, but we haven't always promoted them.
Speaker Change: And so what we need to make sure our customers know is they were with them in every case. If they if they have a matter that is self service, they want to use the self service that's fine. If they've got a large matter where they want our help, we can absolutely help them with that.
Speaker Change: In many of those cases, they're going to leverage our services to help them, let's say, ingest the data or manage the case, but an attorney could wake up in the middle of the night and have a theory about a case that they want to test.
Speaker Change: And they can go directly into Disco themselves and in natural language.
Speaker Change: used Cecilia Q&A to ask a natural language question to test the theory behind their case. So really what we're trying to get through with the customer value proposition of with you in every case is that we've got the best of both worlds.
Speaker Change: We've got an integrated solution with services and product together that can help them in any case, no matter how complex it is.
David Hines: Yeah, yeah, make sense. Well, thank you for the color. Nice to see for your estimates moving higher off of Q1. I don't think we've seen that in a couple years so good luck. Thank you. Yeah, appreciate it. Thank you.
Speaker Change: Your next question comes from a line of Mark Schappel from Loop Capital Markets. Your line is open.
Mark Chappell: Hi, thank you for taking my question. Eric, a question for you. I appreciate your commentary.
Speaker Change: on what you're seeing in the broader macro environment. In your prepared remarks, you mentioned that Disco is well prepared to weather an economic downturn. Could you just provide some additional details on maybe some of the expense levers that you can employ or bring the bear to reduce operating losses if we do dip into an economic slowdown?
Speaker Change: Sure, I'll get started in Mike Lee, Getillipur, to jump in here as well. I mean, the first thing I would say regarding a potential economic downturn here.
you know, historically...
Speaker Change: Litigation has done pretty well in economic downturns. In fact, there could be some headwinds but oftentimes there's also tailwinds that help increase the amount of litigation. So, you know, there's potential this could create some additional opportunity for us.
Now...
Speaker Change: You know, while we don't think we have too much risk there we obviously are always looking at our business and making sure that we're doing everything we can to mitigate against that risk. [inaudible]
Speaker Change: Fortunately, the strategy that we have to work with our clients on their most critical matters, the ones that also happen to be larger, we can tailor to ensure that we're working on the matters that are less potentially impacted by a negative economy.
Speaker Change: And so, from a revenue standpoint, we continue to make sure that we're focused on our strategy around going after the most strategic largest matters in the correct practice areas.
From a cost perspective,
Speaker Change: You know, we're making investments right now to ensure that we're taking advantage of the opportunity ahead of us. This is a big market, it's a growing market. I think Disco over time has the opportunity to be a 20% plus grower.
Speaker Change: But there's certain things that we need to do in this business that are fundamental.
Speaker Change: I've mentioned some of them already. We needed to create a sales enablement program. We had no sales enablement people. We needed to create a new customer success team because we had a very, very small customer success team so that we could free up our sales people to actually go sell and grow the business.
Speaker Change: We have a quote to cash project that we have to complete to help grease the skids and make us much more efficient. And we've rolled out a very targeted account-based marketing approach. So some of those things require investment, and that's investment that we're making right now.
Speaker Change: if we thought it was appropriate for us to...
Reduced Cost, or to be able to...
Speaker Change: You know, to be able to generate more EBITDA sooner, it's possible that we could we could do that. I just want to make sure that we do that in a way that's responsible, then make sure that we're not missing out on the real opportunity ahead of us, which is to accelerate our growth and to not just get to profitability, but to get to sustainable profits.
Speaker Change: Thank you for your time, and I look forward to working with you in the future.
Speaker Change: Great. Thanks. And then as a follow up with respect to your rebuilt go-to-market engine, I was wanting to just comment a little bit on how new customers generally come to Disco. Is it through in-person meetings or events or is digital marketing playing a bigger role?
Speaker Change: Yeah, so new customer acquisition comes into a variety of different ways.
Speaker Change: You know, right now the vast majority of our marketing is shifted to more of an account-based marketing approach.
Speaker Change: It's a combination of events. There is some digital aspect to it. There's a lot of thought leadership associated with it. There's certainly regional activities that we do that tend to be around thought leadership. There's certain events that we go to, like League of Week in New York and March. We're actually, much of a team is at clock.
Speaker Change: this week, which is the Legal Operations Conference. And then there's digital things that we do as well. And we have a sales development team as well. But as you know, the vast majority of our focus right now is not on just acquiring new customers. It's expanding the relationship with their existing customers. [inaudible]
So, you know, we've got-
Speaker Change: Many customers that spend $100,000 plus with us are even a million dollars plus with us.
Speaker Change: And we only have, in some cases, 10 to 15% of their wallet share [inaudible]
Speaker Change: and so by doubling down on those customers to make sure we're working on their larger and more strategic matters, it gives us the opportunity to grow that wallet share pretty significantly.
Speaker Change: And so, we're still acquiring customers, we're making sure that it requires customers that we're acquiring fit within our ideal customer profile, so we're putting energy there, but we've put a lot of resources towards expanding our opportunity within our existing customer base.
Great. Thank you. Denmark.
Speaker Change: And again, if you would like to ask a question, please press star one on your telephone keypad now. We'll pause for just a moment.
Speaker Change: And there are no further questions at this time. I will now turn the call back over to CEO Eric Friedrichsen for closing remarks.
Eric Friedrichsen: Thank you and thanks everyone for joining us today. You know, the Disco team is making really good progress and I'm excited about where we're trending. I'm excited that we're able to increase our full year guidance this quarter. I'm incredibly proud of my amazing Disco teammates.
Speaker Change: and I'm optimistic that the initiatives that we're undertaking right now will be a long-term driver for our performance.
Speaker Change: You know, being a more customer focused organization, improving sales execution, and driving product innovation will be key to drive shareholder value.
Speaker Change: We're excited about what we've accomplished and even more excited about what's next. We're just getting started.
Speaker Change: I'm looking forward to sharing more progress with you in the coming quarters
Thank you.
Speaker Change: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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