CS Disco, Inc. Q3 FY2024 earnings call

Key Points:

• Total revenue up 4% y-o-y; software revenue up 6% y-o-y. Adjusted EBITDA negative $4.5M.
• Eric highlighted progress in becoming customer-focused, growth in high-spend customers, and strategic sales hires (Lauren Caruso as CSO, new sales leaders).
• Notable customer signings, including a large bank and food delivery platform.
• Operational improvements with new leadership in sales, operations, and general counsel.
• Product and engineering progress with generative AI, focus on enhancing eDiscovery platform and security.
• Talent realignment with role eliminations and new hires, and new company values rolled out.

Total revenue for the third quarter of 2024 was $36.3 million, up 4% versus the same quarter last year. Software revenue in Q3 was $30.2 million, up 6% over the prior year. Services revenue was $6.1 million, down 7% year-over-year. Gross margin in Q3 was 74%. Sales and marketing expense for Q3 was $13.8 million (38% of revenue), research and development expense was $11.1 million (31% of revenue), general and administrative expense was $7.7 million (21% of revenue). Adjusted EBITDA was negative $4.5 million, or negative 12% adjusted EBITDA margin.

Guidance:

• Q4 2024: Total revenue guidance $35.2M - $37.2M; software revenue guidance $30M - $31M; adjusted EBITDA guidance -$7.6M to -$5.6M.
• FY 2024: Total revenue guidance $143M - $145M; software revenue guidance $119.4M - $120.4M; adjusted EBITDA guidance -$22M to -$20M.

Forward-looking statements involve known and unknown risks, including those related to legal technology industry changes, AI developments, execution of strategic initiatives, and talent management that could materially affect actual results.

Q: Hey, guys. Thanks so much for taking the question. I wanted to ask a couple here. Maybe the first one on the new Chief Sales Officer. Realizing – I think she's coming back to DISCO. And so thinking about how the company has evolved over the last couple of years and the product itself has evolved over the last couple of years. I'm just trying to think of what sort of further evolution she might drive in the go-to-market from here?

A: Yes. Thanks, Koji very much for the question. I am so excited to have Lauren Caruso join us at DISCO as our Chief Sales Officer. I mentioned, when I got on board that I was going to evaluate our management team and look for opportunities to bring in new talent. And when I decided that we needed a new Chief Sales Officer, I put a lot of time and effort to make sure that we defined the criteria very quickly and closely and that we looked at a lot of different candidates. And so I'm sure you can probably imagine with my background, I have a great network of extremely strong sales leaders. And so we spoke with many of them and we also spoke with several other potential sales leaders outside the organization and ultimately determined that Lauren was a perfect fit for us. So Lauren was one of our top sales leaders at DISCO in the past. She's got a very enterprise-oriented mindset. So she worked with some of our biggest customers in the past. She's very strategic in her thought process and she knows eDiscovery and specifically DISCO inside and out. So she knows our products extremely well, she knows our client base extremely well. So I'm thrilled to have Lauren on board. And look, I'm still overall responsible for the revenue for this organization. As you know, I've got a lot of go-to-market experience in my background. Lauren will be reporting directly to me as our Chief Sales Officer. Sales is obviously an extremely important part of our revenue, but it's not the only important part of our revenue. Our Head of Customer Success and Services reports directly to me our Head of Marketing and Demand Gen reports directly to me. And so I'm going to keep a close pulse on the opportunity and make sure that we're doing everything we can to increase our revenue but I'm thrilled to have Lauren on board as our Chief Sales Officer.

Q: Hi, good afternoon and thank you for taking the question. I was wondering maybe to start if you could talk about Cecilia and what the plans are for that platform, particularly with regard to accelerating your penetration within customers and monetizing that platform as customers might find a lot of value with it?

A: Yes. Thanks Brian. I'm very excited about the future of Cecilia AI, our AI platform. I mean just in general AI has been part of our core eDiscovery platform for more than 10 years. So we've got great traction around AI. Cecilia which is our generative AI platform has a lot of potential. Keep in mind that lawyers are not always the fastest industry to adopt new technology but we've built Cecilia AI with that in mind. So there's a number of things that we've done around the platform to ensure that we get good adoption and the feedback we've gotten so far is really strong. So for example, we have the most secure platform in the industry. We've got the ability where we tag every single document and explain why we tag every single document. When users are writing queries we provide services along with it to help our customers learn how to write prompts for AI and get the best experience out of that. We measure the effectiveness of our solutions by looking at the recall rates and the precision rates and we provide that data to make the results ultimately more defensible. So we've built our platform specifically to help a conservative industry be more likely to adopt our solutions. And look the feedback we're getting so far is extremely positive. We were with one of the largest law firms in the country in the U.S. last week and they are a big user of the ediscovery platform of our biggest competitor and they wanted to see our generative AI solution. We showed them Cecilia and they said it was light years ahead of our competitors' solution. And so they are now evaluating the idea of using the Cecilia AI platform. And along with that moving some matters over to DISCO. So that's just an example. We certainly have gotten traction. We've acquired customers. We've got many customers that are starting to use the system. But the reality is still for this year -- for the next few quarters it's not going to be a material effect on our revenue. And so that's kind of where we're at right now.