Ladies and gentlemen, thank you for standing by and welcome to the CS Disco First Quarter of Fiscal Year 2022 Conference Call. At this time, all participants are in a listen-only mode and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Lee Robinson, CS Disco, Investor Relations. Please go ahead.

Good afternoon and thank you for joining us on today’s conference call to discuss the financial results for Disco’s first quarter 2022. With me on today’s call are Kiwi Camara, Disco’s Co-Founder and Chief Executive Officer and Michael Lafair, Disco’s Chief Financial Officer. During today’s call, we will review our financial results for the first quarter of fiscal year 2022 and discuss our guidance for the second quarter and an update on full fiscal year 2022. Today’s call will include forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including, but not limited to statements regarding our financial outlook, including our guidance for the second quarter and fiscal year 2022, our market opportunity, market position, product strategy, and growth opportunities. 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 irs.cscisco.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 in included in its filings with the SEC from time-to-time, including the section titled Risk Factors in the company's annual report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25th, 2022 as amended on April 29th of 2022 and the upcoming Form 10-Q for the quarter ended March 31st, 2022. 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. A reconciliation 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. With that, I’d like to turn the call over to Kiwi.

Thank you for joining our Q1 2022 earnings call. I'm tremendously proud of what we've built and how we've continued to innovate to create a comprehensive legal technology platform that transforms the way the legal industry works. I continue to be excited about the future of Disco and our goal to be the technology that powers legal. In the simplest of terms, our ethos of Disco is to build an offer technology that frees lawyers to actually practice law, and most importantly, achieve better legal outcomes in a more efficient tech-enabled way. I will begin with a brief overview of our Q1 2022 financial results. We are pleased to have achieved another quarter of strong growth across the business revenue grew to $34.5 million, up 3% year-over-year. Notably, we had a record month in March for Ediscovery usage growth. Our international revenue nearly doubled year-on-year attributable in part to the continued expansion of our U.K. team. These results reflect our ability to continue to increase adoption and penetration with existing clients, continue to win new clients, and expand multi-product usage across our platform. We are thrilled with the continued growth and adoption of our software-powered solutions by lawyers who see the value in shifting to a technology-first approach. I will highlight a few key achievements from the quarter capturing more of the corporate legal value chain in producing meaningful product enhancements continued successful scale out off and execution by our go-to-market organization and a few illustrative customer success stories. In Q1 2022, we expanded our platform to capture a larger portion of the legal value chain and continue our mission to build a complete solution for legal department's needs. Historically, we have done this organically by growing our existing products and building new products in-house like early case assessment and…

Thank you, Kiwi. I'm pleased to discuss the details of another strong quarter and provide guidance for Q2 2022 and an update on our outlook for fiscal year 2022. I'd like to reiterate that our business is primarily a usage based model that is driven by the number and nature of matters, volume of data, length of time on the platform, and other factors that may impact revenue in any given quarter. As Kiwi mentioned, Q1 revenue was $34.5 million, up 63% year-over-year. We had strong performance with growth coming from increasing usage from existing customers and new customer wins particularly in Ediscovery as well as increased usage across all of our products versus the same quarter in the prior year. In discussing the remainder of the income statement, please note that unless otherwise specified all references to our expenses, operating results, and share count or on a non GAAP basis. Our gross margin in Q1 was 74%, up from 73% in Q1 of the prior year. As a reminder, our gross margins fluctuates from period-to-period based on for example, the amounts and types of data ingested and managed on our platform. We expect gross margin to continue to be within the bands we've historically seen. Sales and marketing expense in Q1 was $15.6 million or 45% of revenue compared to 37% of revenue in Q1 of the prior year. This represents an increase of over $7.8 million in the quarter year-on-year. As we've previously mentioned, we are focused on expanding and investing in our go-to-market organization. We have historically been very measured and efficient and our go-to-market organization and feel that now is the right time to invest in scale along with the sustain levels of elevated growth we've achieved in the U.S. and internationally. We've made key hires…

Thank you. [Operator Instructions] And we will take our first question from Koji Ikeda with Bank of America. Your line is open.

Thank you. Hey Mike, thanks for taking the questions here. A couple of couple from me. First, okay, so the second quarter guide and just wanted to ask a couple questions here on that. When looking at it from a sequential basis, it's going to be -- your guidance being down quarter-over-quarter and that's similar to how you guided or initially guided to the first quarter when you -- on the fourth quarter calls, so it kind of understand that put some takes there, but just wanted to be sure, is there anything that we should be thinking about in the second quarter to call out? Is there anything seasonal? Is there any matters that that has come off already off the platform that we should be thinking about? Any sort of help there and just kind of reconcile that quarter-over-quarter decline with the guide there?

Hey, Koji, it's Michael, really great question. As you know, since we went public, we've actually guided down every single quarter sequentially. And part of that really has to do with the fact that we're a usage based model. And on a quarter-to-quarter basis, there can be variability in the numbers. We're also very prudent in our approach to guidance as we've discussed many, many times. And we have raised our full year guidance for the year we've really good visibility into the full year. We feel really confident about that number, and that's kind of where we are with our guidance.

Got it. Got it super helpful there. Just wanted to be sure. Second question, maybe for Kiwi. Okay, so congrats on the acquisition of have Congruity360. It adds that legal hold technology, also that legal request compliance technology. And we were talking to a couple of people within the legal industry. And they mentioned that adding this capability really would help drive enterprise adoption of disco. And I wanted to ask you, why is that? What is it particularly about this legal hold that it's so important within the enterprises?

So, I think it's two things Koji. First is the part of the platform that in house counsel, so the lawyers who work in the corporate legal department are most likely to engage with directly. And second is the earliest stage of the process. So, let me talk about that a little bit. If you think about a big piece of litigation, it might start out being handled by the corporate legal department, where they do the initial assessment of the case, they interview business side people, they collect data, they implement legal holds. But as the case matures, if it doesn't settle, they will typically engage outside counsel a law firm, to go handle the actual mitigation of the case. And so it often winds up that even though a corporation is our client, and is using the product initially to collect and conduct early case assessment data downstream in time, the principal users are at a law firm that is representing the company and that piece of litigation. So the advantage of having the Hold and Request products is that we have the products, which are corporate customer, the person who's ultimately paying our bills is actually using directly in the course of one of these legal matters. The second point is when they use it. So because this can request is the product used first. And then Disco Hold is the product use. Second, by the time the case is underway. The client is in some sense, deeply invested in using our platform. And the natural next step is to proceed to use products like Disco Ediscovery, then Discovery Review, then Discovery Case Builder. And so I think that's why you're hearing customers say there's a lot of value to a single integrated solution.

Got it. Got it. Thanks so much for taking my questions, Kiwi and Michael. Thank you so much.

We'll take our next question from Tyler Radke with Citi. Your line is open.

Hey, thank you for taking the question. So there's been a lot of discussion in the investor world about usage based models and some concerns that as we get into a, more of a tougher economic backdrop that customers can pull back spending a little bit faster on usage based models. And I'm curious your perspective on this and to what extent would you kind of characterize the health of the spending environment in Q1 and as things progressed here into Q2? Thank you.

Sure. So, first of all, Q1 was a terrific quarter, as you can see in the numbers, big beat and 63% year-on-year growth. In terms of the broader question, I think the COVID quarter was really a great test of how resilient our usage based business model would be, to customer side stress. And you'll recall that in the COVID, year, we had one sequentially flat quarter in Q2 of that year. And then we accelerated in Q3 and Q4, ultimately delivering more than 40% year-on-year growth for the full year. I think that's a good indicator of what a really bad economic situation might do to our business. The last observation I'll make is, often in law firms, people think about the corporate or transactional partners, lawyers who do M&A or securities, or project finance as carrying the law firm in times when the economy is booming. And then in times when the economy is doing less well, it's the litigation or disputes side of the house that tends to carry the overall fortunes of the law firm. And so there's a sense in which litigation disputes has historically been regarded as counter cyclical. If you think about all the litigation that was created in the wake of the 2008 crisis, or the.com crisis. Those are some good examples. I don't know that I would go so far as to say that Disco's business is counter-cyclical. But what I would say is that the demand for legal services and people's exposure to legal requirements continues independent of the position and the economic cycle.

That's helpful perspective. Thanks, Kiwi. A follow-up for Michael, obviously, there's been a lot of pressure out there on company's profitability. And I'm curious now that you've been public for some time and several quarters and as you look at your spending plan for the year, just kind of how you've adjusted your plan, if at all, if you've thought about areas of, of incremental efficiencies and just kind of some of the puts and takes in operating margin outlook? Thank you.

Thanks Tyler, really good question. So, as we issued in the release, earlier today, we're we've reaffirmed our guidance for the full year adjusted EBITDA and we raised our revenue. We are -- the macro environment is obviously interesting to watch. But from a business perspective, we're going after the $767 billion market, we saw them small piece of that overall market. And so we really do not want to change our spending profile, because we believe as we continue to expand, those investments are going to pay back in multiples. So, that's kind of where we are sitting.

Thank you.

And we'll take our next question from Brent Thill with Jefferies. Your line is open.

Thanks Michael. Just following up on the expense question. With the escalating loss, where are all investments going? You mentioned the doubling of the sales team. Are you continuing on that track? Or do you double again this year? Can you just give us a sense of where the big investments are going?

Yes, I mean, we're continuing to scale our go-to-market. And we -- Kiwi, and I have talked about that, since the IPO in terms of really doubling down on our go-to-market team. And continuing to get efficiency from those investments, we're going to monitor those investments as we continue to make them and also continuing to invest in the product, to scale out our solution, to continue our market lead in the product and the solution that we have.

And Kiwi, when you think about beyond you discovering the other families of apps that you have, can you just talk to this importance now in the model, and over time, what you're seeing in that multi-product adoption?

Yes, I think we talked a lot about this in our full year earnings call, where we laid out a sort of five pillar strategy towards becoming the companies that builds technology that powers legal work every everywhere this legal work is done. And I think being multiproduct is a very core part of that strategy. So, if you look at what we've done, historically, we started with Ediscovery going really deep on one of the most expensive and problematic parts of the legal process review of millions, tens of millions or even hundreds of millions of documents that are involved in legal disputes, investigations or other kinds of legal matters. Then from there, we expanded both later in time in the process with products like Disco Review and Disco Case Builder, and then earlier in time with products like Disco early case assessment, Disco Hold and Disco Request. And hopefully the strategy there is coming clear. Our idea is to give corporate customers more and more places where they can begin to engage with our platform and start using the platform. And then to encourage them to adopt a multi-product solution regardless of where they start. So a customer can start with Hold. And then it can be very natural for them to expand to Ediscovery and Review and Case Builder downstream. Or a customer might come to us initially with an interest in Disco Review, and then find that it's better to use the platform to manage testimony as well as documents, expand to Case Builder and then find that actually, they should manage their whole litigation portfolio in the platform and implement a solution like Hold or Request as an enterprise-wide solution. So that's the idea to create more entry points by building products that cater to different kinds of legal needs. And then once the customer is on the platform, they have that magic discovery experience. And that is something that you can use to cross-sell them into other Disco products over time.

Can you quantify the percentage of revenue beyond Ediscovery? Or is that something you're not breaking out?

We don't disaggregate revenue by product line. You can get some sense just by estimating when we've introduced the various products. Disco Ediscovery is obviously the most mature of our products. It was our original product. Our second product Disco Review was introduced next, and then Disco Case Builder. So at least in a sense of ranking, you can get information there. I'll tell you the reason we don’t disaggregate is because we believe that over time, we're going to continue to introduce more and more products. And we think of those products just as different ways of using the same underlying platform. So we don't really care whether a customer starts out by using Hold or Case Builder or Request or Ediscovery or Review, what we want to do is to get them using our platform somehow, right? Whatever is easiest for them, and then drive adoption of the platform across more and more categories of their legal work over time, which should enable us to capture a growing percentage of their overall legal budget over time.

Great. Thank you.

And we will take our next question from Scott Berg with Needham. Your line is open.

Hi, Kiwi and Michael, congrats on the good quarter. And thanks for taking my questions. I've got two here. First of all, Kiwi, just want to start off with some of the work we've done in the space recently, one of the comments that came up with a law firm was the complexities today are so much more difficult than what they were 10 or 15 years ago in the Ediscovery process because of there's so many more data formats today, whether it's Slack or teams or data that might be in a video call or ancillary application -- applications, trying to digest them is difficult. Is that a driver right now that you're seeing for customers trying to adapt the Disco platform in particular? Or is that maybe an ancillary components of why a customer might select you today?

Yes. So we see growing demand for the newer kinds of data. So Slack has been a huge explosion in demand, supporting Office 365, supporting Zoom recordings. And then different industries have their own specialized things. So for example, construction has a lot of CAD/CAM, some of the newer software companies that probably many of you cover, have introduced their own formats that then need to be supported in downstream Ediscovery applications. So that is a driver. I wouldn't say that it's the number one driver. The number one driver is not so much the explosion the variety of data, it's the explosion in the sheer volume, right? So it's not so much that Slack is a difficult file type to handle. Instead, when you collect Slack, you might collect 10 Slack messages for every one email that you use to collect when people were principally using email. And so you'll see this continuation of a trend where, when I started practicing law 20 years ago, maybe a big case was a million documents. And then a big case became 10 million documents. And now big case was a 100 million documents. And what that drives is a demand for systems that are highly performant, even under that kind of extreme load. And that today remains, I think, the number one reason why customers switch to Disco, it’s amazing performance regardless of the scale of the database. The second thing it drives is a need for a more efficient way to actually understand what's in those documents and to find the evidence. And that's the shift away from brute force associates flipping through documents to AI-powered review solutions, which can actually keep up with the explosion in the scale of the data.

Got it. That's helpful. And then you all have spoken a lot about sales and marketing investments and doubling of the core bearing reps headcount in the year-over-year basis. But how should we think about the growth in sales and marketing overall, how much of its going towards these direct resources versus your ability to press them to partner accelerator a little bit to drive more indirect sales?

So we remain optimistic about the partner channel over the medium-term, as is no secret. I believe that the products we're building are the future of the industry. And those products, when they're adopted, they just fundamentally change what it is that the channel does. They reduced the need for services by replacing services with software. Now that's obviously a difficult transition for partners to make. And so you see folks who are early in the adoption cycle partners who've been with us for six, seven, eight years now. You'll see some larger partners who are beginning to dip their toes in the water with Disco. And we've talked about some of those on the past couple of earnings calls. And I think over time, you'll get to a tipping point where more of these folks build large businesses on top of Disco. But we're not there yet. The bulk of our go-to-market effort today is direct. And we don't believe that we're dependent on converting the channel, right? We'd like to bring the channel along. But for those who don't come along, we're perfectly happy to compete with them in the market. We do that every day. So in terms of where investment is going, it mirrors kind of our current sources of revenue, which is to say that the bulk of the investment is going into our direct sales force, and some investment is going into building up this challenge program. Again, we're very optimistic about the growth of the channel over the medium-term.

Great. That's all I have. Thanks for taking my questions.

And we'll take our next question from David Hynes with Canaccord. Your line is open.

Hey, this is Luke on for DJ. Thanks for taking the question. So Kiwi, you called out the March quarter in particular being a record month for Ediscovery growth? Could you just expand on what you saw there? Maybe what that implies for the shape of Q1, and then to what degree you've seen that momentum fold into April and May so far?

Well, what we saw is sort of exactly what we said. We saw a tremendous spike in usage, specifically of our Ediscovery product, and specifically in March. We're very excited about the growth of our business, both Ediscovery and really all the other products. And we look forward to sharing with you some updates on what's unfolded in Q2 on the Q2 earnings call.

Okay. Thank you.

And we will take our next question from Derrick Wood with Cowen. Your line is open.

Great. Thanks and congrats on the strong quarter. Michael, start with you back on kind of the guidance question. I noticed, it looks like you beat the midpoint of your Q1 guidance by $4 million, but kind of only raising the full year outlook by roughly $2 million. So just was there any pull-forward dynamic? Or have you gotten a little more conservative in your assumptions, because of the macro or any other factors that we should be thinking about that you didn't have that full flow -- Q1 beat full -- fully flow through the year? And I also noticed the Q2 guide being a little bit wider range on revenue than you historically have, any reason behind that?

So, not really, Derrick, thank you for the question. So the beat in Q1 we were really pleased with the 63% year-over-year growth and I believe it was a 12% against our guidance. In terms of the full year, we raised the full year and we've only been out -- I think this is literally our fourth quarterly conference call. And we want to be prudent in our guidance and we raised the full year.

And just to be clear, there's nothing you're seeing from a macro demand perspective that as you changing any of your assumptions. Obviously, it sounds like you're raising the full year. So I would assume not.

That is correct. .

Okay. And then the 10-K showed that 81% of revenue from $100,000 plus customers last year. That was a nice uptick from 74% in the previous two years. Does that reflect more concerted focus up-market and perhaps going to be less focused at the lower end of the market? Or does that just kind of reflect the maturity of your base? And having a lot more graduates to the 100k level. And just any thoughts on how you see that number trending forward would be helpful?

It's more the latter. It reflects the maturation of the base rather than any fundamental change in the segments that we're targeting. But it is both. So if you look at the DISCO's story over time, we started out by selling to litigation boutiques and the clients of those boutiques. And that was our original segment because they tended the entrenched relationship with one of our competitors. And then over time, we began selling up-market to the Am Law 200 and then directly to corporate legal departments. And in general, when you have a corporate legal direct sale, you're getting a larger chunk of their wallet upfront and it grows more quickly. And so those accounts tend to be larger, just again, because you're dealing with them directly rather than accessing them through the law firm channel. So there is a little bit of that going on. But our focus on selling to corporate legal departments has been underway for several years now. So that's not a change that you're seeing in the more recent numbers. What you're seeing in the numbers is really, again, this trend we've talked about a couple of times, where customers are starting out spending more and they're growing their spend more quickly. So whereas in the past, it might have taken three, four or five years to get a customer to middle six figures, low seven figures. Now you have some customers, and we talked about some examples in our prepared remarks, doing that ramp more quickly, some of them inside of the year, some of them over the course of one year to two years, but certainly more quickly than the historical average.

Great color, Kiwi. I appreciate it.

[Operator Instructions] And we will take our next question from Parker Lane with Stifel. Your line is open.

Yes. Hi. Thanks for taking the questions. Congrats on the quarter. Kiwi, I think you pointed to strong sales efficiency in the SCR channel this quarter, perhaps the best basis you've had in any other quarter. What are some of the factors that you would attribute to that sales efficiency gain? And do you expect that to continue here throughout the year?

Yes. So this has been an area of focus for us over the past – well, for a long time, but really over the past year. And it's a complex of changes. First, on the management side, we've brought on board and now successfully ramped some really great director and manager level folks who are driving increased performance on that team. Second, I think we have really perfected our hiring profile in terms of the kinds of people, who do well in the seat. Third, we've made big investments in LND. So we have this program called DISCO University that we've talked about a little bit on prior calls. And DISCO University now has very robust on-boarding training for people in each of these core sales roles, including SDRs, and then there's follow-on experiential learning, coaching that's provided as they get on-boarded certifications to get them product awareness and so on. And also, at the other end, so as SDRs mature in their careers at DISCO, we have these great bridge programs, what we call bridge programs run by DISCO University that get those SDRs ready to be super successful CSMs or AEs or other kinds of roles in our go-to-market organization. And so it's one of those things where there's no silver bullet. It's about a continued focus on getting a little bit better every month, every quarter, and then those gains start to compound.

Got it. And when we look at the international teams today, would you say that there's room for improvement on productivity, just given how new that organization is? Or is that holding up fairly well compared to the US counterparts.

Well, Hell, I think I have room for improvement in productivity, and we all try to get a little bit better every day. One of our core values is actually crack and it's that idea that regardless of what you do, whether you're a salesperson or an engineer or an accountant we can always get better, and we feel systems are – I think this really the key part of our success. Like, we built a really robust BI organization that measures the heck out of everything. And lets us see what's working and what's not working and where we can make progress and or not. And because of that robust analytics structure, we're able to allow teams to experiment a lot, right, and then call the thing things that work and propagate them across the rest of the organization. This is probably a more long-winded answer than you wanted. But I think one of the amazing things we're observing in the UK is that they build. It's like a mini startup, right? And so they've been able to innovate in the approaches that their SDRs that their CS people and that their salespeople take in working with clients in that market. Some of those innovations have been taken back to the United States improvements and some of them didn't pan out. And so I think in the UK it's a very interesting example of an organization that has both been very successful and that has allowed us to innovate in a way that can drive increased performance in the US as well. Of course, at a macro level, the UK is very early in its growth, and we're investing behind it because of the amazing results it's delivered, but there's a very long runway ahead.

Understood. Appreciate all the color. Congrats again.

We will take our next question from Mark Schappel with Loop Capital. Your line is open.

This is Ken filling in for Mark Schappel. Thank you for taking my question. I would like to ask, the company has an aggressive hiring plan this year, and the markets particularly good IT talent continues to be tight so to date, where you are you in respect to the hiring plan are you on plan or ahead or behind?

As of now we are no plan. So it took us a little while to get there. You’ll remember, in the past two earnings calls, I described us as sort of getting there, but not quite there, and now we're there. In terms of how we recruit great people to DISCO, I think it's a combination of offering people the opportunity to work on a mission that matters. In our case, using technology to strengthen the rule of law and then how do you build a culture that empowers people to really do things that at other places might be regarded as impossible and that greatly accelerate their careers. And we're proud not only our recruitment, the recruitment side of the engine, but also at the fact that we have never really suffered from a spike in attrition due to the so-called resignation.

That's really helpful. Thank you.

There are no further questions at this time. I will now turn the call back to Co-founder and CEO, Mr. Kiwi Camara, for closing remarks.

Thank you for joining us today. At Disco, our ultimate vision is to strengthen the rule of law through the use of technology, and we're just getting started. We thank you for your interest in Disco and for joining our Q1 2022 earnings call.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.