CS Disco, Inc. (NYSE:LAW) Q4 2023 Earnings Call Transcript February 23, 2024
CS Disco, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by, and welcome to CS Disco’s Fourth Quarter and Fiscal Year 2023 Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Head of Investor Relations, Aleksey Lakchakov. Please go ahead.
Aleksey Lakchakov: Good afternoon noon, and thank you for joining us on today’s call are Scott Hill, Disco’s Chief Executive Officer; and Michael Lafair, Disco’s Chief Financial Officer. Today’s call will include forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, but not limited to, statements regarding our financial outlook and future performance and our future capital expenditures, market opportunity, market position, product strategy and growth opportunities and developments in the legal technology industry. In addition to our prepared remarks, our earnings press release, SEC filings and a replay of today’s call can be found on our Investor Relations website at ir.csdisco.com.
Forward-looking statements involve 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. Forward-looking statements represent our management’s beliefs and assumptions only as of the date made. 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 entitled Risk Factors in the company’s quarterly report on Form 10-Q for the quarter ended September 30th, 2023, filed with the SEC on November 9, 2023, and the Company’s upcoming Form 10-Q for the quarter ended December 31st, 2023. In addition, during today’s call, we will discuss non-GAAP financial measures.
These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalents is available in our earnings release. And with that, I’d like to turn the call over to Scott.
Scott Hill: Thanks, Aleksey. Good afternoon, everyone, and thank you for joining us. I would like to start with a few comments on a strong end to 2023 before turning to our objectives for 2024. Fourth quarter, total revenue increased 10% versus last year to $35.7 million. Full year 2023 total revenue was $138.1 million up 2% from the prior year. Software revenues, which include revenues from eDiscovery and other software product offerings, grew 5% to $29.3 million in the fourth quarter. For the full year, software revenues grew 3% to $112.3 million. We had 1441 customers as of December 31st, 2023, which is 9% more than a year ago. Importantly, we had nearly 300 customers that generated more than $100,000 in revenues in 2023, up 9% compared to 2022.
The number of customers who generated more than $1 million in revenue also expanded to 26% during 2023, and finally, we saw the multiproduct attach rate improve to 15% at the end of 2023, up from 11% at the end of 2022. We have more customers spending more money and buying more of our products, and we believe there is meaningful room for additional expansion in our existing customer base. Services revenues, which include revenues from Disco review and professional services, were $6.5 million in the fourth quarter. Full-year services revenue was $25.8 million, flat from the prior year. Q4, 2023 adjusted EBITDA was negative $1 million. Fiscal year 2023 adjusted EBITDA was negative $25.9 million. We ended the year with just under $160 million in cash on our balance sheet.
2023 was a year of change for Disco, but we’re pleased with the return to growth we saw within our software business exiting the year. As we turn to 2024, we are focused on continuing to reaccelerate our revenue growth, investing to enhance our software product offerings, including advancing our innovative Cecilia capabilities and strengthening our operating framework to improve our efficiency and profitability. And importantly, under the strong leadership of our Chief Human Resources Officer Karen Herckis, we are building a stronger cultural foundation that we believe will be critical to sustaining our success. Let’s start with continuing to reaccelerate revenue. We struggled with a number of distractions during 2023, but I’m proud of how the team executed and delivered a solid end of the year, and importantly, I’m very confident that we have the leadership and team in place, focused and motivated to build on that momentum.
Of particular note, we’re fortunate that Andrea Popovecz agreed to step in as our Senior Vice President of Global Sales. Andrea brings over 30 years of experience in the legal industry across all segments, having led sales teams for over 20 years at LexisNexis and over seven years at Epiq. He hit the ground at full sprint and has already improved and accelerated a number of our key initiatives. The great news is that we have always had a large addressable market, a growing customer base, and industry-leading products. I believe we are now developing and deploying the right sales approach to capture a greater portion of that significant opportunity. Entering 2024, we have taken a number of steps to improve our sales execution and drive our software dollar-based net retention back above 100%, from 97% exiting 2023.
We have bifurcated our customers into specific profiles and are developing sales motions that better reflect the nature of those distinct groups. We have reorganized our sales team to reflect these groupings and their needs. We’ve enhanced our sales plan, committed to a more constructive channel partnership, and refined our pricing strategy. We have also combined our services and customer success functions under Melanie Antoon’s leadership as our Chief Customer officer to reposition customers at the center of what we do. We believe these initiatives will improve our customer satisfaction and MPS scores and enable consistent revenue growth across both existing and new customers. In support of these sales and customer initiatives, we are refining our investments in lead generation, marketing, and brand awareness and we are already seeing signs of progress.
Since the launch of the Lady J campaign last year, we have seen organic searches for Disco trippled and we have received over 10 million views and 32.8 million impressions across various platforms. A third-party survey of over 1000 U.S. based legal professionals indicated that we are now the most cited eDiscovery technology platform among all of our competitors. It’s very common for us to hear new leads and customers mention the Lady J campaign as they first begin their Disco journey. We must now do a better job in 2024 of converting this increased awareness into revenue growth. Our product and engineering teams are also doing a great job of supporting our sales efforts by continuing to enhance our industry leading eDiscovery offering at an unprecedented pace.
While, also further developing our market leading Cecilia AI capabilities and our innovative legal platforms including case builder, hold and request. With Cecilia Q&A now generally available in the U.S., we were able to sign our first several customers. The customers were a combination of law firms and large corporate users and we are already hearing some great feedback. It was exciting to hear the founding partner of a leading Houston based law firm explain to us the benefits they were receiving from Cecilia. He mentioned they are using Cecilia on a very large database with over 1.4 million documents in a very tight deadline. They demonstrated to their end client how Cecilia could ultimately save them hundreds of working hours and help accelerate the speed and quality of the work at the same time.
This partner also told us how he himself is able to use Cecilia to find answers to very specific questions with only a couple of clicks, while his team finds it far easier to get started and execute reviews with Cecilia. The early success we are seeing with Cecilia isn’t expected to be a large contributor to our 2024 revenue, but it is certainly opening doors to new and existing customers and is laying the foundation for future growth by extending our lead in innovation in the legal industry. It also demonstrates why we believe it is imperative that we continue to invest to enhance our eDiscovery offering, including advancing our innovative Cecilia capabilities. During 2023, our product and engineering teams worked together to release major AI innovations, including Cecilia Q&A, which increases the efficacy and efficiency with which lawyers review documents, and Cecilia Timelines and tagging, which enhance the way lawyers prepare cases.
Our product and engineering teams have also been hard at work on Cecilia Auto review, which is now in private testing and has the capability to significantly automate and improve the accuracy and quality of large, tedious document reviews. As we pivot to 2024, we expect the rate and pace of innovation to continue as we add additional skills to our Cecilia AI platform. We announced the launch of Cecilia Deposition Summaries at Legally in January. This generative, AI-driven solution enables legal professionals to automatically create deposition summaries, which have traditionally been a tedious and time-consuming task. Our team is also working to integrate the primary law asset, which we licensed in late 2023, into Cecilia, which will marry facts with the law on a single technology platform for the first time.
We anticipate launching primary law capabilities later this year, and while we’re excited about Cecilia, the key to our success in 2024 remains our core eDiscovery software and services offerings. During the fourth quarter, we continued to deliver key functionality that our customers need, including deeper integration capabilities between timelines and eDiscovery, a new capability to track user activity, and last-accessed user information. Production sharing, which allows lawyers to securely and easily send legal productions to a third party, and work product permissions, which allows users to keep work confidential from document viewers such as expert witnesses. In January, our team delivered the ability to sort on a custom field, which is one of the most asked-for enhancements on our roadmap.
Our product and engineering teams are extremely talented and dedicated, and I’m confident that 2024 will be another banner year in product development that will delight our customers, enable revenue growth, and strengthen the foundation of our future success. We are investing in local and globalized talent to supplement capacity. While we continue to build a comprehensive litigation platform which we believe will truly transform the way legal work gets done. We believe we are positioned to return to meaningful growth with a much more precise focus on serving our customers. We will invest to solidify our technology footprint, enhance our core offerings, and build our lead in product innovation. We intend to do all of this while also vigilantly focusing on the strength of our balance sheet and cash generation.
In order to do that, we must strengthen our operating framework to improve our efficiency and profitability by developing the processes, systems, and infrastructure necessary to scale efficiently and profitably. One important initiative that we will continue is expanding our presence in India to enable additional future efficiencies. In 2023, we grew our employee headcount in India from zero to over 100 employees. We anticipate approximately 20% of our workforce will be based in India by the end of this year. We are also working to enhance our CRM processes and systems and rebuild our customer success and sales ups functions. We will enhance our security and controls capabilities and develop an improved quote to cash process as well as enhancing other key back office processes and systems.
These are critical initiatives that will enable our future ability to scale. Finally, while the Board continues to evaluate a strong set of candidates to be Disco’s next leader, I remain fully engaged as CEO and I’m very excited about 2024. As I enter my Sixth month in the role, I want to reiterate some of the things I mentioned on the last Earnings Call over three months ago. I remain convinced in the amazing talent, the industry-leading products, the sizable market opportunity, and the strategic roadmap we have at Disco. I now believe we have also made significant and necessary improvements to our culture and our go-to-market approach. But something else became clear in the time that I’ve spent in this role. We had stopped investing in our people.
We cut key sales functions and fuel capacity to save money without having a cohesive go-to-market strategy. We reduced R&D capacity to the detriment of our product roadmap. We asked our G&A resources to work harder without addressing key system and process gaps. Those actions pushed us closer to profitability, but not in a sustainable way. As I’ve said in my remarks this afternoon, we are going to invest in correcting those missteps. We believe these investments, combined with reaccelerating revenue growth, will put us on a sustainable path to profitability during 2025. The opportunity is there. Now we have to execute. With that, I’ll turn it over to Michael.
Michael Lafair: Thank you, Scott. In Q4 2023 total revenues were $35.7 million, up 10% year-over-year. Software revenues, which include revenues from eDiscovery and other software product solutions were $29.3 million, up 5% year over year. Services revenues, which include Disco managed review and professional services, were $6.5 million, up 37% year over year. Full-year 2023 revenues were $138.1 million, up 2% year over year. Software revenues were $112.3 million, up 3% from prior year. Services revenues were $25.8 million flat versus last year. Growth in our professional services was offset by a year-over-year decline in revenues from our review product offering, which resulted in a flat performance. Total dollar-based net retention as of 2023 year end was 92% and as Scott mentioned, software dollar-based net retention was 97%.
In discussing the remainder of the income statement, please note that unless otherwise specified, all references to our gross margin, operating expenses, and net loss are on a non-GAAP basis. Adjusted EBITDA is also a non-GAAP financial measure. Our gross margin in Q4 was 76% and gross margin for fiscal year 2023 was 75% in line with Q4 in fiscal year 2022. As we mentioned before, our gross margins fluctuate 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. Sales and marketing expenses for Q4 were $13.0 million or 36% of revenue, compared to 52% of revenue in Q4 of the prior year. For fiscal year 2023, sales and marketing expenses were $62.1 million or 45% of revenue, compared to 51% of revenue for fiscal year 2022, a decrease of over $6.5 million year on year.
The decrease was primarily driven by a decrease in sales and marketing personnel costs. Research and development expense for Q4 was $8.7 million or 24% of revenue, compared to 41% of revenue in Q4 of the prior year. For fiscal year 2023, research and development expenses were $42.3 million or 31% of revenue compared to 38% of revenue in fiscal year 2022, a decrease of over $8.8 million year on year. This decrease was primarily driven by a reduction in research and development personnel and a decrease in per-employee cost as a result of globalization efforts. General and administrative expenses in Q4 were $7.8 million, or 22% of revenue, compared to 20% of revenue in Q4 of the prior year. For fiscal year 2023, general and administrative expenses were $30.2 million, or 22% of revenue, consistent with general and of expenses as a percent of revenue in fiscal year 2022, general and administrative expenses were just about flat year on year.
Operating loss in Q4 was $2.2 million, representing an operating margin of negative 6% compared to negative 37% in Q4 of the prior year. Operating loss for fiscal year 2023 was $30.5 million, representing a margin of negative 22% compared to negative 36% in 2022. Adjusted EBITDA was negative $1.0 million in Q4, representing an adjusted EBITDA margin of negative 3% compared to an adjusted EBITDA margin of negative 34% in Q4 of the prior year. Adjusted EBITDA in fiscal year 2023 was negative $25.9 million, a margin of negative 19% compared to a margin of negative 33% in 2022. Net loss in Q4 was $0.3 million or negative 1% of revenue compared to a net loss of $10.8 million or negative 33% of revenue in Q4 of the prior year. Net loss in fiscal year 2023 was $22.8 million or negative 17% of revenue compared to net loss of $47.0 million or negative 35% of revenue in 2022.
Net loss per share for fiscal year 2023 was $0.38 per share compared to $0.80 per share for fiscal year 2022. Turning to the balance sheet and cash flow statement, we ended Q4 with $159.6 million in cash and cash equivalents and no debt. Operating cash flow in fiscal year 2023 was negative $25.5 million compared to negative $46.0 million in fiscal year 2022. Now turning to the outlook for Q1, 2024, we are providing total revenue guidance in the range of $34.5 million to $36.5 million and software revenue guidance in the range of $29.5 million to $30.5 million. We expect adjusted EBITDA to be in the range of negative $8 million to negative $6 million. For the fiscal year 2024 we are providing total revenue guidance in the range of $143 million to $155 million and software revenue guidance in the range of $120 million to $127 million.
We expect adjusted EBITDA to be in the range of negative $26 million to negative $19 million, reflecting the investments Scott previously discussed. Now I’d like to turn the call over to the operator to open up the line for Q&A, operator.
See also Goldman Sachs Penny Stocks: Top 12 Stock Picks and 13 Best Falling Stocks To Buy Right Now.
Q&A Session
Follow Cs Disco Inc.
Follow Cs Disco Inc.
Operator: [Operator Instructions] Your first question comes from Scott Berg with Needham & Company. Please go ahead.
Robert Morelli: Hi, this is Robert Morelli on for Scott Berg. Thanks for taking my question. You know, as you guys touched on January you know, the departure of Luke McNeal as CRO, can you just touch on how, if at all, this has impacted your 2024 outlook and your go-to-market motion for the year? Thanks.
Scott Hill: Yes. Hi, Robert, and Scott, here. Thanks for the question. We were disappointed to have Luke depart, but I have to tell you that Andrea Popovecz who stepped in his place, got on Board remarkably fast. I placed a phone call to her literally a week before I kick off, a couple of weeks before legal week, and you wouldn’t know that she had just stepped into the role. I think the fact that she’s been in our industry for 30 years, 20 years at LexisNexis and seven at Epiq really gave her a lot of forward momentum as she stepped into the role. And frankly, she picked up some of the good work that Luke had started with a broader sales team and has really helped us refine and enhance. So, I really don’t feel like — now we do feel like we haven’t lost the step, I think we have a little bit more forward momentum as we move into the year.
Make no mistake, a lot of the things that we’ve talked about in the call are things that we are just starting to deploy. So we had a good fourth quarter, a nice way to end the year. You can see that our guidance is that we think we’ll have a similarly good start to the year, but those things aren’t really driven by the initiatives that we’re launching and deploying right now. But I have the utmost confidence in Andrea and her leadership team and our team out in the field and inside sales across the Board to go and do the things that are necessary to deliver revenue in the range that we provided for the year.
Robert Morelli: Got it. That’s helpful. And then, regarding Cecilia, great to hear some of the positive feedback, on any update on the monetization strategy there. And when it comes to the guide, is there any sort of uplift, you know, incremental ads there, make then? Thanks
Scott Hill: You know, as I mentioned in my prepared remarks, there’s not a significant dependency on Cecilia revenue in 2024 per se. But as I noted, she is definitely opening doors to not only existing customers who are looking at ways to extend their partnership with us, but also customers that maybe we’ve had before and are now open to coming back, new customers with whom we haven’t spoken before. And so the impact on 2024, I think, is we’re once again demonstrating what Disco started with, which is the leading innovator in the space. And so customers want to talk to us about what we’re doing. And while we’re in the room, of course, we can talk to them about buying our eDiscovery platform in the next case. We can talk to them about deploying Case builder across the case.
We can talk to them about our hold and our request offering. So that’s really the impact that Cecilia is having now, as I said, we do have some customers that are using Cecilia right now on cases and who are paying us for that. So I’m excited that the process has begun. But there are a number of different ways Cecilia thinks of her as a thing, but it’s really the skills that matter. You think about Timelines, which are released and live, and a part of our Case builder Q&A, which is being used by paying customers today, but we also have Auto Review or tagging coming down the line, which will, I think, greatly enhance our customers doing review. You’ve got the Deposition summaries that we announced at Legal Week, but that’s not even fully launched to our customers yet.
That should be launched in the near future. So a number of different skills that enhance existing products, enhance existing workflows, and I think provide a number of different opportunities for us to package, bundle, and price in a way that our customers will find really attractive. And so contribution this year is door opening. The contribution as we move into ’25 and ’26 is even more revenue growth opportunity because frankly, we need that acceleration to continue to make the investments to innovate for our customers.
Robert Morelli: Got it. That’s helpful. Congratulations on the quarter. Thanks.
Operator: Your next question comes from Mark Schappel with Loop Capital. Please go ahead.
Tim Greaves: Hi, this is Tim Greaves on for Mark. One from me, with respect to your overall demand environment, could you provide an update on whether you’re seeing any changes with your customers, like over the past 90 days in terms of buying pattern, sales cycles, or any additional sign offs on deals closed?
Scott Hill: I wouldn’t say that I’ve noticed any notable difference. As I mentioned, we had a good end of the year. We’ve had a good start to a really good January, and moving into February, I think a good start to the quarter. So, no, I don’t note any particular change in terms of buying patterns. But again, what I am noticing, and I just spent, I guess it’s now been two or three weeks ago, a little bit of time for the first time at legal week, but our booth was buzzing. And again, I think it goes back to some of the innovative offerings that we’re talking about. What I’m seeing is an additional engagement, a reengagement across existing and new customers that I’m excited about again, that aren’t necessarily yielding right into January and February. But I think certainly will allow us to accelerate as we move through the year.
Tim Greaves: Okay, thank you.
Operator: Your next question comes from David Hynes with Canaccord Genuity. Please go ahead.
David Hynes: Hi, guys. Scott, Michael, I need to ask about customer ads. Right? I mean, they were negative in Q4. You added 10 customers in the back half of the year. Just what’s going on there? I mean, it seems to be a market slowdown from what we saw in the first half of the year. And I guess it begs the broader question of what’s the best leading indicator that we should be paying attention to for the health of the business.
