CS Disco, Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Financial Performance: Fiscal year 2024 software revenue increased 7% to $120.1M, services revenue was $24.7M, total revenue $144.8M up 5%. Adjusted EBITDA was negative $18.7M, an improvement of $7.2M from the prior year. Ended the year with $129.1M in cash and short-term investments.
• Customer Focus: Refined customer-centric approach; met over 70 customers, with feedback that customers love products and people. Focused on marketing value proposition, building trust through tech capabilities and services expertise.
• Go-to-Market: Aligned sales org under new CSO, focused on talent, high-value customers, and realigned incentives. Marketing pivoted to account-based strategy to target ideal customers.
• Product Innovation: Prioritized engineering for customer-centric features, including Cecilia generative AI. Q4 2024 introduced advanced reproductions and document-level Bates numbering. Cecilia Q&A adoption growing, aiding large matters.
• Internal Operations: Improved decision-making and execution via internal frameworks and leadership changes.
• Cultural Improvement: Employee sentiment improved, attrition declined due to leadership changes and strategic vision.

Segment Performance

• Software Revenue: Fiscal year 2024 software revenue was $120.1 million, up 7% from the prior year. Services revenue, including DISCO review and professional services, was $24.7 million in fiscal year 2024. Total revenue for fiscal year 2024 was $144.8 million, up 5% from the previous year.
• Gross Margin: Q4 2024 gross margin was 75%, and for fiscal year 2024 it was 75%, inline with fiscal year 2023. Software revenue contributed approximately 83% of total revenue ($120.1M out of $144.8M), while services revenue made up about 17% ($24.7M).
• Customer Base: Ended 2024 with 315 customers contributing over $100,000 in total revenue (up 9% year-over-year). Revenue from customers with over $100,000 in revenue grew more than double those with less. There were 19 customers with over $1 million in revenue, and a multi-product attach rate of 17% at year-end.

Guidance

• Q1 2025: Total revenue guidance $35 million to $37 million, software revenue guidance $30.1 million to $31.1 million. Adjusted EBITDA expected to be between negative $8.0 million and negative $6.0 million.
• Fiscal Year 2025: Total revenue guidance $145.5 million to $157.5 million, software revenue guidance $124 million to $131 million. Adjusted EBITDA expected to be between negative $19 million and negative $15 million.
• Long-Term Goal: Aim to reach breakeven adjusted EBITDA in Q4 2026 by focusing on large customers and driving efficient revenue growth.

Risks

• Forward-looking statements involve known and unknown risks that may affect actual results, including market competition, customer adoption of new products, and execution of go-to-market strategy. Fluctuations in customer usage and revenue due to the nature of data ingested and managed on the platform also pose risks.

Question and Answer

Q: Hey, guys. Thanks so much for taking the questions. I wanted to ask about maybe the selling environment in legal tech and specifically on AI tools. Is it potentially getting harder selling AI legal tools today versus maybe a few years ago? And the fact that it seems like there's a lot of tools out there now. And when we see that within software categories, it tends to cause a lot of confusion with buyers. And so maybe help us understand what is the selling environment like and what is the key feature or value prop today that is driving new customer adoption?

A: Eric Friedrichsen: I would say that the selling opportunity within the legal industry actually has gotten a little bit easier more recently than it has in the past in terms of their interest or willingness to look at various AI tools. I think you know that DISCO has had AI built into our platform since almost the inception of the company several years ago. But the generative AI solutions obviously are much newer within the last 18 months. We've seen pretty incredible adoption over the last year of our Cecilia products. And keep in mind that our Cecilia products are very specific to the use cases that we are trying to solve for. So if you think about Cecilia Q&A, it's all about asking questions of the facts in the database to help our customers do early case assessments for their clients, to help them very, very quickly get to the facts of the case that are the most important.

Q: I mean, is this a hard target? And what I mean by that is regardless of where growth ends up, is the business willing to do what needs to be done to achieve that breakeven EBITDA target in 4Q '26. And once that is achieved, is it safe to assume that adjusted EBITDA should be positive from there on out on an annual basis? Thank you.

A: Michael Lafair: Koji, good question. So we're really confident in our strategy and our kind of reshift on focusing on large customers and the guidance range we provided in 2025. We obviously haven't provided revenue guidance for 2026. Our goal, and we've been talking about this consistently, is working towards sustainable profitability and growth long term. We've reallocated our investments in areas that we believe will make the biggest impact to drive revenue growth, especially around our targeted customers. By focusing on larger customers, it's going to enable us to grow more efficiently. And our current cost structure with really modest increases, we believe, will support the business as we drive revenue growth. Look, there's many ways to get to positive adjusted EBITDA. And while there are many ways to get there, I'm confident in our strategy to grow revenue and to achieve sustainable profitability and to hit that target at the end of next year in Q4.

Q: The improvement in overall dollar net retention, do you see that number going above 100 again? And if so, can you talk about the vectors that are out there, so volume versus multi-product adoption?

A: Michael Lafair: Yes, sure. Look, in terms of our improvement in DNR, I'm very pleased. I think we probably included mostly salient points within the prepared notes, but our software retention got back to 100% from 97%. Our total revenue retention went from 92% to 96%. And that software, that improvement was really driven by our larger customers, by those that spend more than $100,000 with DISCO. So I'm confident that with our go-to-market approach, we have the opportunity to continue to improve DNR over time.

Q: can you all just talk about the level of conservatism that you're embedding into the guide for 2025?

A: Eric Friedrichsen: I'll take that. Let me just discuss guidance. So the guidance that we're providing for the full year and also for Q1, it's the best estimate of where we think things are going to land in the quarter and for the full year. I'm really confident in our overall strategy. We do believe that it may take a bit of time to see some of the results from the actions we're taking as we focus on larger customers. You didn't ask about Q1 guide, but I'll just mention part of the Q1 guide includes volatility in the review component of services, but I am confident in our overall strategy and our guide for the full year.

Q: I was wondering if you'd just spell out your investment priorities for the coming year?

A: Eric Friedrichsen: Yes. Hi, Mark, nice to hear from you. Very clearly, we are invested in growth. We have determined exactly who we think our ideal customer profile is, the exact types of matters that we believe. We are the most successful with, that we can help our clients the most with, and to create the most opportunity to accelerate revenue for DISCO. So that's really where we're putting our investment. In terms of go-to-market, we've got, from a sales perspective, we shifted significant investment over the last quarter from account executives and sales development representatives over to enterprise sales reps. So we've beefed up our enterprise sales staff. We have restructured and enhanced our sales leadership. From a marketing perspective, we have pivoted to more of an account-based marketing strategy that's very much focused on targeting our top accounts, those that we think have the most opportunity and that can grow. And then from a customer success standpoint, we've really started to rebuild our whole customer success function. One of the things that I included in my prepared remarks was a discussion about how we've changed the roles for our sales and customer success teams. Our salespeople have traditionally been more of account managers to really kind of manage the book of business. And what we have done now is we've restructured their roles so that salespeople are very much focused on going to go get the next matters and going to sell the next products and really expand the relationship with our customers, while our customer success team is responsible for customer satisfaction, responsible for adoption of our products, responsible for renewals and retention of those particular customers. And therefore, we've also reset our compensation strategy and comp plan for our salespeople to really, really incentivize them to help grow accounts. From a product standpoint, we're doubling down on our core ediscovery products and our Cecilia generative AI products. That's where we're putting the vast majority of our investment when it comes to product.

Q: Great to see the large customer growth on the platform. And I guess if I could maybe just pivot back to the question that was just asked and some of the color you provided on go-to-market changes, particularly among the sales force. Can you help me understand how much account addition or change was there associated with those changes? And as these sales reps kind of assume new functions in a more, I guess, sales-focused role, how mature would you say they are? I'm trying to get to a level of maturity, particularly with regard to executing on the platform and when you think they might reach full maturity and when we might see better productivity in the numbers?

A: Eric Friedrichsen: Okay, sure. Well, I think the first thing I would just say is that I'm already very pleased at the early results that we've gotten in our penetration for larger customers. Our number of customers who spent more than $100,000 with DISCO last year went up by 9%. The amount of revenue generated from that same group of customers that spend more than 100,000 of us grew at more than double, significantly more than double the rate. In fact, the vast majority of the growth that we had last year came from that segment. So that is, we're already starting to see some progress with our focus on those largest customers. In terms of the team, we've already hired a number of new enterprise sellers. We still have some rolls open that we're hiring for, but I feel like we are adequately staffed at this point. The biggest change that we needed to have really was to free up time from our salespeople to stop doing account management and to put all of their focus and effort into selling. So that was the main shift. So a lot of that was done by shifting workload to customer success reps. Some of it has also been done by the operational improvements that we've put into the business.

Q: it seems like a bit of a wider range of guidance, particularly on the top line that you've offered this year. I guess how would you bring your approach to guidance? I know you said you were confident in your ability to execute to that level, but what would be the primary governors of achieving the upper end of that guidance range?

A: Michael Lafair: So it's a fair question. I don't believe the range this year is really any different than the range that we provided last year at this time for '24. In terms of the confidence, what we talked about a little bit is, and what I previously mentioned, is there's a shift in strategy. And as a result of that shift in strategy with the focus on larger customers, we do believe that that's going to lead to and drive us to revenue reacceleration at a faster rate than the old approach that we used to have. That could take a little bit of time. We're not exactly sure when that's going to move in completely in the direction, but we are really confident that the strategy is going to work. We already have seen signs of it working, and I believe there's a lot of upside from our focus on large customers. As you can see just from the metrics, the large customer count grew 9% year-over-year, and the contribution of our growth from the larger cohort has been very significant as opposed to the tail. So it's really a shift. I believe there's a lot of upside.

Q: You guys called out a 17% multi-product attach rate. Are you seeing significantly different attach rates amongst your enterprise customers than your kind of store customer base?

A: Michael Lafair: I mean, the attach rate went up, I believe, from 15% from what we previously disclosed to 17%. That includes our Cecilia product, and we're happy with the growth in the attach rate, but I don't actually know the number offhand, and we don't disclose kind of the mix between enterprise versus non-enterprise. I would say there has been a ton of interest from all of our customers in Cecilia Q&A, both the enterprise large law firms and also smaller firms, and it does attract a ton of interest, and we're really pleased with the number of customers and the growth that we saw, particularly in Q4.

Q: When customers adopt Cecilia Q&A, do you see them adopted one matter at a time, trying to figure it out, you know, test it out first, or do you see kind of full adoption across their matters?

A: Eric Friedrichsen: Yes, typically they'll start with one matter, and then from there they will grow to additional matters when they have success.