CS Disco, Inc. (LAW) Earnings

Management highlights

### Product Momentum - Strong total revenue growth with 14% year-over-year increase, software revenue up 12% year-over-year, and services revenue up 25% year-over-year. Fourth consecutive quarter of accelerating total revenue growth excluding one-time contingent deal. Adjusted EBITDA improved 32%. ### Customer and Matter Growth - Increased wallet share among biggest customers with 347 customers generating over $100,000 in revenue in the last 12 months, accounting for 77% of total revenue. Accelerated net new large matters added, which are more promising as they generate more revenue and last longer on the platform. ### AI Adoption - Continued adoption of generative AI capabilities with Cecilia AI and AutoReview. Cecilia Advanced Research in testing with select customers, showing fantastic feedback. Auto Review leads the market in speed and efficacy, driving managed review offering growth. Disco Platform had better than expected launch with strong demand, showing trends like larger matters, increased committed revenue, multi-year deals, and growing AI adoption. Examples like Mound Cotton and Reynolds Brazil LLP illustrate strong customer relationships and platform adoption.

Guidance

For Q2 2026, total revenue guidance is $41.5 million to $43.5 million, software revenue guidance is $36.1 million to $37.1 million, and adjusted EBITDA is expected to be negative $4.5 million to negative $2.5 million. For fiscal year 2026, total revenue guide is increased to $169.25 million to $178.75 million, software revenue guidance is $146 million to $152.5 million, and adjusted EBITDA is expected to be negative $8 million to negative $4 million.

Segment performance

In Q1, total revenue grew 14% year over year to $41.9 million. Software revenue grew 12% year over year to $34.7 million. Services revenue was $7.2 million, up 25% year over year. Adjusted EBITDA improved 32% to negative $3.5 million. The number of customers that generated more than $100,000 in total revenue during the last 12 months increased to 347, with revenue attributable to these customers totaling $124 million, representing 77% of total revenue over this period and 13% year-over-year growth. Disco Platform saw strong demand with better than expected adoption. Auto review capabilities led the market in speed and efficacy, and managed services also had strong Q1 performance.

Analyst Q&A

• Q: Hi, everyone. Thanks for taking my questions. Probably a question for Eric or Richard. Wanted to start off with, I think, the A topic in the space in the quarter. there's been a lot of questions we feel from investors on the ability for customers within the litigation space to use some of the, I'll call them tools that have been released on you know, frontier large language models out there. And you all addressed that a little bit in your prescriptive remarks. But I think the question in all that is, did it actually disrupt sales cycles or maybe how your customers were using the product during the quarter, you know, as they maybe, quote, unquote, tried or wanted to evaluate those technologies? Or did you really see it maybe more as a non-event in your operational activities?

  A: This is Richard. Thanks for that question. And I think it's an important dynamic to unpack a little bit. It's It's certainly written about a lot that generative AI has the ability to commoditize some of the simple steps that lawyers do, right? Whether it's summarizing documents or running a search or drafting. But I think it also, in some ways, elevates the intelligence layer where Disco, right? That's where we've invested. That's where we shine because the context that comes from the power of how Disco's platform powers litigation, brings evidence and facts to light for our customers, right? It's so much more powerful than what any... large language model or a tool that's simply built on top of that large language model could ever do even with the same data. And so I think what we're seeing is our customers realizing that e-discovery actually presents a real shift from just a simple tool to perform a job into something that with Disco can give them a strategic advantage. Yeah. Hey, Scott, I'll add on to that. This is Eric. No, we haven't seen any slowdown at all in sales cycles related to these new technologies tools that have come out. In fact, if anything, it's helped us drive AI adoption because lawyers overall law firms are, uh, you know, much more interested to see how AI can impact them. And we've got AI that can drive incredible ROI and, uh, help provide better outcomes ultimately for customers clients. So, uh, the short answer is no, we haven't seen any negatives at all. It's been, it's been very positive for us. Uh, excellent. Thank you. And then from a followup perspective, You all commented that the Disco platform, I think, saw better interest in adoption in Q1 than maybe what you had initially anticipated there. But in your conversations with customers so far, I guess, what have you found in terms of pricing and use relative to, I don't know, a customer that was just using eDiscovery before? If you could help us understand maybe... what that opportunity or journey is like to take a customer from what's historically been a single solution on the Disco platform to the all-in opportunity there. I think that'd be really helpful. Thank you. A: Really, demand for AI is what drove far better than expected results for the Disco platform adoption. Certainly, there was some pent-up demand from both our customers and our sales teams. They were excited for the opportunity to have Cecilia, AI, Case Builder, and all of our core eDiscovery capabilities integrated across all of their matters. So that's the main driver. But also, as you remember, our old pricing model was hard to understand. And it made some customers feel that we were much more expensive than the competition, especially for larger matters, when we were actually pretty similar. And so a shift to more of an apples-to-apples pricing model was you know, has really increased our consideration for new matters and for new customers. And it's made a big impact already. I mean, we've seen some very big and complex matters starting the Disco platform right here out of the back in Q1. We've seen increased revenue commitments. We've seen longer-term agreements from some of these customers. So, you know, Disco platform is off to a great start. And, you know, I'm really optimistic about the future. Excellent. Nice quarter. Thanks again for taking my questions. Thanks, Scott. Our next question comes from David Hines with Canaccord. Your line is open. Please go ahead. A: Hey, good morning, guys. Eric, I want to ask a big picture kind of industry implications question related to the AI-driven advancements we've seen in legal tech. Do you think it makes it so that the largest firms are able to take on more so that they own kind of more of the space or Does it level the playing field so that smaller firms are able to be more competitive? And I guess what are the implications of all this perspective change for Disco? A: Yeah, I'll get started and others can come over to chime in, DJ. But look, I think this is an opportunity for law firms to generate more revenue, you know, that the whole legal industry right now. is rethinking their business models. And what AI can do is give the opportunity for these law firms to be able to take more business in-house that they were previously sending out to alternative legal service providers. If you think about, particularly when it comes to the review process, this low-level, low-dollar work that was fairly mundane tasks that law firms were didn't really feel like fit their model for the most part in how they wanted to provide value to their customers. Um, where they were sending it out to these, uh, alternative legal service providers doing, doing that human work. And, you know, part of that was they were missing out on the revenue. The other part of it was they were losing the context of all that great work. And so now the fact that they have the opportunity to leverage much, much better technology with generative AI and products like auto review. to be able to bring that business back in-house, add extreme value on top of it in terms of legal judgment and generative AI consulting services, and keep the context in-house to really help their lawyers go drive case strategy, it's a real game changer. Ultimately, the law firm can generate more revenue that's good for Disco, but also the end client can save money and get better outcomes. So ultimately, I think This is a big shift and a big opportunity for each of us. Yep, yep, makes sense. Aaron, a follow-up for you. So the $100K plus net ad number was particularly strong this quarter, but software revenue has held more or less flat the last few quarters. Can you just help me understand that dynamic? Are the customer ads a leading indicator and software revenue should follow, or is You know, is the uptick in folks moving over that spend threshold just services driven? Like, how should we think about this? A: I think when you look at the quarter and you look at the movement of the 100K customers, we're very, you know, we're certainly happy that sequentially it grew 5% quarter over quarter. And I would definitely characterize that as a leading indicator. But the reason for that is obviously the matter comes in. it ingests and then it expands, it moves onto the platform. So that's the dynamic that happens and that's why it's a leading indicator. I'd also add though with that, when you think about it as a leading indicator, there's going to be, you know, there's movements both ways, right? You have matters coming in, you have matters going off. And so you're always in a usage model looking at the triangulation of both. And so it is obviously having a strong quarter is usually is a good leading indicator of those matters coming in, but it also depends on what's coming out and that's what goes into our models. I think when you look at the quarter, relatively speaking, one of the other, um, elements you asked about kind of with the growth is, and I touched on this in my prepared remarks with auto review, you know, we're super happy with the traction we've seen. It's actually brought us, um, new, new customers matters. It's brought us matters from existing customers. And in bringing those in, what happens is those customers come in at varying states of AI readiness. And so it comes in through the pipeline. We've seen a handful of those go and convert and become managed reviews. And so that helps drive. So auto review actually helped drive part of the beat on the services line for the quarter, which is why we're very proud to come in at the upper end of the range there. At the same time, you know, we're happy that some of those came in, became managed reviews, but subsequently those customers have come back to us with other matters and chosen auto review. So I think what you're watching, and Eric kind of alluded to this too, is, you know, law firms are becoming more and more comfortable with AI and how it plays. And so we're watching that closely. Yeah, I think it also just speaks to us with you in every case, customer value proposition, right? So we're with our customers in every case. And if they choose at a certain point, because they're not quite ready to use auto review, we can leverage our AI managed services and our managed review to really help them in the short term. So, you know, overall, I'm incredibly pleased about the revenue, 14% revenue growth for the business this quarter. Yeah, yeah. And just so we're all perfectly clear, auto review falls into the software line and managed services obviously falls in the services line. Is that correct? A: Correct. And auto review actually has two components today. It actually has part of it sits in software and part of it sits in services. And the reason for that is that actually goes to some of the familiarization part of it as well. What happens is today, you know, a customer, we might actually help engineer the prompts for them. So that's still manual work that we do as we set them up. But I think as customers become more familiar over time, that prompting will not be required. And so it'll become fully, you know, it'll be truly software revenue. But today it sits partially in software and partially in services. Yeah. Okay. Very good. Thank you guys. There are no further questions at this time. I will now turn the call back to Eric Friedriksen, CEO, for closing remarks. A: Yeah, thanks, everyone. Thanks for the questions. Q1 was a strong quarter for Disco. The demand for AI capabilities grew better than expected results for the launch of the Disco platform. We're already seeing benefits from our new pricing model, which was designed to increase consideration, to improve win rates, to reduce discounts. to improve stickiness and ultimately to provide more value to our customers. I've said before, and I'll say it again, that I believe that Disco could be a 20% plus grower over time. In the first quarter, we made continued progress on the key drivers that are going to make that happen. Things like increasing our share of wallet with our large customers, acquiring larger matters and accelerating AI adoption. So all three of those demonstrate that our strategy is working. And along with our product roadmap and where we're going next, Disco is really poised to be the leader in AI for litigators. We've increasingly, we've increasingly transformed high stake litigation through our purpose-built legal workflows. We are very much focused on litigation, not general legal. And when you combine our strategy with our path to reach adjusted EBITDA profitability in Q4 this year, We believe this goes on an excellent trajectory today, and we're positioned for the future as our solutions become increasingly the standard to help litigators win. So thanks for your time today. We'll see you next quarter. This concludes today's call. Thank you for attending. You may now disconnect.