CS Disco, Inc. (LAW) Earnings

Management highlights

- New Product Launch and Strategic Direction * Management announced the launch of the Disco Unified Litigation Solution, the company's most significant long-term investment, which expands Disco beyond eDiscovery to a full end-to-end integrated platform for litigators from case filing to verdict. * The solution unifies native access to a matter's full eDiscovery evidentiary record (including metadata and existing customer work product) with Disco's full license to U.S. case law, court rules, statutes, and regulations, delivering contextual litigation intelligence that general-purpose legal AI tools cannot match. * The solution is currently in a pilot learning phase with a small hand-selected group of customers on live active matters, with three provisional patents filed for its novel approach. * Advanced Research, the company's agentic AI capability for eDiscovery, will roll out to all customers in the coming weeks after successful pilot testing. - Core Operating Performance Highlights * The number of customers generating over $100,000 in annual revenue grew to 354, with this segment contributing 77% of total trailing twelve month revenue and representing 15% year-over-year revenue growth. * Revenue attributable to Disco's generative and agentic AI capabilities more than tripled year-over-year, with AutoReview setting a new quarterly revenue record driven by higher matter count, larger average matter size, and growing customer AI readiness. * Adoption of the new Disco Platform commercial pricing model significantly exceeded internal expectations, hitting the full year (December 2026) run rate target by June 2026. The model's transparent pricing and inclusion of Cecilia AI with all matters has driven higher demand and faster adoption than forecast. * Non-GAAP gross margin held steady at 76% year-over-year, with sales and marketing expense holding at 36% of revenue and R&D expense holding at 31% of revenue, as the company continues to invest in AI product development. - Core Growth Strategy Execution * The company continues to prioritize growth in the size and complexity of matters hosted on its platform, as larger matters generate higher lifetime revenue, remain on the platform longer, and drive higher AI adoption. * Growing wallet share with large, sophisticated law firm and corporate customers remains a core priority, as this segment delivers more predictable, durable recurring revenue. * Disco's engineering organization has shifted to an AI-first development methodology, enabling faster parallel development of the unified litigation solution, Advanced Research, and AutoReview enhancements.

Guidance

- For Q3 FY2026, management guided total revenue of $43.75 million to $45.75 million, software revenue of $38.1 million to $39.1 million, and adjusted EBITDA of negative $1.75 million to negative $0.25 million. - For full fiscal year 2026, management raised total revenue guidance to a range of $172 million to $179 million, and raised software revenue guidance to a range of $147.5 million to $152.5 million, reflecting increased confidence in second half performance driven by strong year-to-date execution, Disco Platform adoption, and AutoReview traction. - Full year 2026 adjusted EBITDA guidance was updated to a range of negative $8 million to negative $5 million. Management reaffirmed its expectation that Disco will reach adjusted EBITDA positive profitability in Q4 FY2026.

Segment performance

In Q2 FY2026, CS Disco reported two core revenue segments. Total revenue for the quarter was $43.1 million, representing 13% year-over-year growth. The Software segment generated $36.8 million in revenue, up 13% year-over-year, and contributed 85.4% of total Q2 revenue. The Services segment generated $6.3 million in revenue, up 18% year-over-year, and contributed 14.6% of total Q2 revenue.

Risks & headwinds

- The new Disco Platform commercial model may result in short-term revenue drag from lower one-time ingest fees, even though this is expected to be more than offset by higher long-term recurring fees from larger, longer matters. While no meaningful impact has been observed to date, it may emerge in future quarters. - The new Unified Litigation Solution is an ambitious multi-year development and commercial initiative, with no firm pricing, monetization, or full launch timeline finalized as the company remains in a pilot learning phase, so revenue from the solution is not expected in FY2026.

Analyst Q&A

• Q: What is the customer adoption cycle for the new Unified Litigation Solution, will it be sold as an add-on for existing eDiscovery customers or net-new, and what pricing model do you plan to use?

  A: The solution is currently in a pilot learning phase with a small group of deeply engaged customers on live matters, with no finalized commercial or launch plans. The company intends to learn how customers use and value the capability before locking in pricing, packaging, or timing, and investors should not build any revenue from the solution into 2026 forecasts. Management notes the solution addresses strong unmet customer demand for integrated litigation AI, represents an enormous long-term opportunity, and is the next evolution of CS Disco as a company.

• Q: Do you expect customer demand will require you to open your platform to integrate with competing general legal AI tools as adoption of these platforms grows?

  A: Litigation is fundamentally more complex than transactional legal work, requiring deep native access to all evidentiary facts and full legal corpus data to deliver the insights litigators need. Competing general-purpose AI tools only have limited access to required case law data (one leading competitor only has access to 1% of the required data per its own partner), while Disco has full, direct control over all necessary data, giving Disco a major competitive differentiation.

• Q: How much of the strong Disco Platform traction is from new customers versus expansion with existing customers, and what is the update on sales productivity?

  A: Disco Platform traction is a mix of both new logos and expansion of new large matters with existing customers; the new transparent pricing model has improved consideration from both groups and increased close rates while preserving margins, meeting all early goals. Sales productivity has improved meaningfully due to multiple factors: integrated go-to-market that enables law firm customers to sell Disco to corporate clients on Disco's behalf, a targeted focus on larger, strategically valuable matters that drive higher downstream revenue, differentiated AI capabilities that win larger deals, and the simplified Disco Platform pricing model.