Ladies and gentlemen, thank you for standing by and welcome to the CS Disco's Second 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 second quarter 2022. With me on today’s call are Kiwi Camara, Disco’s 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 second quarter of fiscal year 2022 and discuss our guidance for the third quarter and an update on full fiscal year 2022. 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, including our guidance for the third 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 quarterly report on Form 10-Q for the quarter ended March 31st, 2022, filed with the SEC on May 13th, 2022 and the company's upcoming Form 10-Q for the quarter ended June 30th, 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.

Welcome and thank you for joining our Q2 2022 earnings call. We have just marked a big milestone the completion of our first 12 months as a public company. In Q2, we brought on some amazing new hires. As mentioned in our last earnings call, we added our new Chief Human Resources Officer to Jignasha Grooms. We also brought on a new Chief Marketing Officer, Tom Furr who joined us from MongoDB and will help drive Disco's brand awareness. We also welcome the new Vice President of Product Strategy Katie DeBord, who formerly served as Global Chief Innovation Officer at the law firm Bryan Cave, Katie brings deep domain expertise and insight into what lawyers want and need. In June, our inaugural class of associates and interns joined Disco's Emerging Leaders Rotation Program. We brought in 39 top graduates and 10 interns from 17 different universities across the United States. Following an intensive onboarding program that included learning our industry and business and many law school experience and the legal tech hackathon, these emerging leaders who have joined every part of our company, including sales, marketing, product, finance, and HR. We are excited to develop this next generation of talent during their three-year associate program and see the impact that each of them will make at Disco. And now I'll talk about our Q2 results. Revenue for Q2 was $33.7 million, above the midpoint of our guidance range. Our Q2 revenue grew 14% despite a very challenging comparison in Q2 2021 when revenue grew 88% and benefited from a small number of large reviews. In each of our earnings calls, we have explained how the usage based nature of our business can result in revenue volatility as a result of changes in the timing and nature of usage on our…

Thank you, Kiwi. I will now discuss the details of our recent quarter results and provide guidance for Q3 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 of matters, nature of usage on the platform, volume of data, length of time on the platform, and other factors that may impact revenue in any given quarter. As Kiwi mentioned, Q2 revenue was $33.7 million, above the midpoint of our guidance range. While Ediscovery had strong performance and we're seeing traction with our newest Hold and Request products, year-on-year revenue was impacted by volatility in usage by some of our customers, particularly in Review. In discussing the remainder of the income statement, please note that unless otherwise specified, all references to our expenses, operating results, and share count are on a non-GAAP basis. Our gross margin in Q2 was 76%, up from 71% in Q2 of the prior year. As a reminder, our gross margins fluctuate from period-to-period based on for example, the amount 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 Q2 was $17.6 million or 52% of revenue compared to 36% of revenue in Q2 of the prior year. This represents an increase of approximately $7 million in the quarter year-on-year. As we previously mentioned, we've been focused on investing in our go-to-market organization. We continue to feel that now is the right time to invest and scale our business in order to capture the opportunity ahead. While there is ramp time for new hires, we're measuring and closely monitoring the returns on investments we are making…

Thank you, Mr. Lafair. [Operator Instructions] We go first to Koji Ikeda with Bank of America

Hey, guys, thanks for taking my questions. I wanted to kind of dig in on the guide, this is clearly going to be very topical for you guys here coming out of the quarter. So, totally understand kind of the commentary there on the Review product. But wondering if you could get a bit more granular on why is there so much volatility in the Review? Why is it causing that guide down? Is there anything else to call out or was considered with the revenue guidance? And maybe anything with some big cases that might be falling off? And just kind of thinking about the guidance, Michael, appreciate the Ediscovery percentage contribution for the total 2022 guidance, it looks like about 75% of revenue. But thinking about Review, how much was that as a percentage of revenue maybe over the past several quarters? Thanks, guys.

Thanks Koji. So, our review business enables much larger ticket sizes. We've talked in the past that customers who adopt multiple Disco products, principally Ediscovery, and Review, their total spend can wind up being two to three times their spend on Ediscovery alone. So, that's driven by big ticket Reviews. In addition, the Review business as a whole is relatively earlier in revenue scale than the Ediscovery business. And as a consequence, there is more volatility in the Review business caused by the timing of activity in large reviews. To put this a bit in perspective, if you focus on reviews, that bill more than a million dollars in a quarter, two or three of those Reviews, make the quarter a great quarter, two or three more make it a complete home run. And so the kind of volatility that we're talking about, is driven by the presence or absence of a low single-digit number of large reviews.

Thank you. We go next now to Tyler Radke at Citi.

Yes, thanks for taking the question. So, obviously the a pretty significant cut to revenue guidance, but it looks like you're largely maintaining your investment posture. Maybe you just give us a sense, like, on a normalized basis understanding that the macro environment is difficult today. But how do you kind of expect longer -- long term growth to trend? I mean, obviously, you're making investments, still at a pretty healthy pace. So presumably, you're seeing no change in the in the long term market opportunity. But I guess as we think about growth beyond this year, just help us frame what levels you're achieving for and investing for? Thank you.

Yes. We've been pleased with the continued steady growth in customer count. We disclosed in our prepared remarks that customer count is now at 1,255 representing growth of 27% year on year. So, focusing on customer count abstracts a little bit from the volatility that is created by changes in the volume and nature of usage on our platform by particular customers in any way particular quarter. In addition to that steady growth and customer count, I talked a bit about the unit productivity and aggregate productivity across our go to market teams. Now, that we are four quarters into the sixth quarter go to market build out that I talked about at time with IPO. So all those fundamentals of our business seem to be tracking well, and give us an appetite to continue our level of investment. Although, of course, we adjust the level and direction of our investment from time to time based on market conditions and the performance we see in the business. In terms of long term growth, Michael mentioned in his remarks that our original Ediscovery product, we anticipate will do more than $100 million of revenue this year, growing more than 30% year-on-year, that product has gotten to a level of revenue scale, that decreases the amount of volatility that is created by particular customers, or particular matters. And so I think you can think of that as a base on top of which we have invested in layering these newer products, things like Disco Review, Disco Case Builder, Disco Hold, and Disco Request. And we've talked about how those products unlock materially larger ticket sizes, customers who are using multiple products can wind up spending two times to three times, what they would spend on Ediscovery alone. This gives us the leads that over time, there will be an opportunity to accelerate growth, both by continuing to add new customers at a steady pace, as we've demonstrated, and by continuing to expand those customers encouraging to move more legal workloads and more kinds of legal work on to the Disco platform.

Thanks. So just a --

Thank you. We go next now to Derrick Wood at Cowen & Company.

Thank you. I guess Kiwi. I mean, in your prepared remarks, you talked about how your market is, withstands the macro headwinds, and in fact, often leads to more disputes and litigation activity. Why do you think you're seeing this kind of change in demand behavior play out, especially considering your Review technology has a strong ROI? I guess, just trying to get a sense for what is strength changed so dramatically over the last three months? And is it perhaps due to some lost customers from using Review? Or can you just shed a little bit more color on why the customer behavior is doing what it's doing?

Sure, it's less about lost customers and more about changes in customer's usage on the platform. Again, to put this in perspective, the presence of two to three large reviews, reviews the bill more than a million dollars in a quarter, would cause this to be a great quarter. And two to three more reviews would cause it to be an absolute home run quarter. So the volatility that we're talking about in the Review business has to do with the presence or absence of a low single digit number of big ticket reviews. We're not seeing anything fundamentally different in win rates or in the demand environment or in sales cycle times or anything like that. And I think you can see that demonstrated in the steady growth we've shown in customer count, which to some extent abstracts away from this volatility in usage.

Thank you. And ladies and gentlemen, just reminder, please limit yourself to one question. We go next now to at Arvind Ramnani at Piper Sandler.

Hi, thanks for taking my question. So I just want to ask this question a little bit differently on guidance and kind of the impact that a couple of clients may have on overall Review. So given, just your clarified, like, you may have just two, three clients kind of make the difference between okay, quarter, quarter, good quarter or good quarter, excellent quarter. Would you as an investor, should we expect this type of volatility as basically part of the business and is this type of volatility repeatable? And then if that's the case, should we really look at expanding the range of the guidance here provide to more than four or five million?

So on every quarterly conference call, we have emphasized that our business can demonstrate volatility in revenue from quarter to quarter, driven by changes in the nature and volume of usage on our platform. And as a reminder, those changes in usage are driven less by customers decisions about what kind of legal technology they want to adopt, and more by exogenous factors that are often outside the control of the particular customer. For example, the timing of a new lawsuit or investigation, ruling, a lawsuit or investigation that increase or decrease the scope of data and Review involved, or the timing of an adjudication or negotiated settlement. In terms of the volatility going forward, we think there were two big contributors to the volatility of our Review business. First is that the ticket sizes for Review can be materially larger than the ticket sizes for Ediscovery. You've heard me mentioned several times that 2x to 3x total spend of customers adopting multiple products as compared to their Ediscovery spend alone, those larger ticket sizes are coupled with Review being earlier in its product life. And as a consequence, having a smaller revenue base, I think there's some wisdom we can take from how we saw the Ediscovery product go through its journey. Early in its life, when it had earlier revenue scale, the Ediscovery project to exhibited more volatility, because any particular matter or customers usage represented a larger percentage of the overall Ediscovery revenue. But now the Ediscovery product we anticipate will do more than $100 million of revenue this year, with a growth rate of 30% or more. At that kind of revenue scale, we have seen materially decreased volatility for the discovery business. We believe that as the Review business reaches similar revenue scale, we'll see a similar decline in the volatility of that business.

Yes. That's that really helpful. Thank you very much.

Thank you. We go next now to Brent Thill at Jefferies.

Hi. This is Luv Sodha on for Brent Thill. So thank you, again, for taking my question. I wanted to ask about a pretty big, the sell in margin guidance for the year? Could you just apart from the marketing investment, what are the investments or plan on the product? Or the sales side in terms of headcount? And could you maybe give us how you're tracking the productivity of these reps, maybe give us some additional color there. Thank you.

The EBITDA guidance is principally a function of the moderation we're doing to our revenue guidance. And again, that is us reflecting Q2, and then adhering to our guidance philosophy of providing prudent guidance for the forward quarter. In terms of our investments in go to market. We look at a variety of things. And I talked about some of them in my prepared remarks today. One of the things we're most excited about are increases in productivity, both in the aggregate, and on a unit basis from our sales development representatives who generate new opportunities, and our customer success team, which generates upsell and cross-sell opportunities in the existing customer base. Both of those teams for the past couple of quarters have set new records for productivity in the aggregate and on a per person basis. One of our learnings as we continue to build out of the go-to-market organization, is that right now, when so many of our sellers have relatively short tenure, a disco, more than half of them have been here less than a year, there's an opportunity to increase the level of investment in lead generation relative to quota carrying sales capacity. And so we will be shifting the direction of our investment in the back half of the year accordingly, increasing our investment in SDRs and CSMs, and also scaling out marketing programs with the addition of our new CMO.

And thank you. We go next now to Scott Berg at Needham.

Hi, Kiwi and Michael, thanks for taking my question today. Kiwi, let me ask this a different way. I know we're all kind of asking roughly the same question plus or minus, but your new guidance calls for second half revenues to be down 21.5% at the midpoint with that $17 million reduction. That's the big number annualized is $34 million. I guess, what we're trying to understand is in this review product $17 million, even if I break it up between two quarters sounds like it's more than just a couple of customers, how can the -- I guess how can the magnitude be that big in the swing factor be that big in this one area, because it's not a couple gigabytes of data usage, it's not a few million bucks one way or the other necessarily, that's the big enough number and a big enough percentage that it's outside of, I think, our standard deviation or to what we would think volatility in this model of look like? Thank you.

I think the magnitude we're talking about in the review business, and specifically, what we saw a shortage of in the second quarter are a couple one, two or three large reviews billing north of a million dollars per quarter. The presence or absence of one to six of those reviews can take a quarter from good to great to a complete home run. And again, that is volatility that's created by the big ticket sizes in review, as well as the relatively small size of the review revenue base today. In terms of our go forward guidance, we have sought to de-risk the guidance as much as possible, and to adhere to the guidance philosophy that we've articulated on each of our prior earnings calls where we expect to be prudent in our forward guidance. Now that will result in some quarters that have outsized beats, as you've seen in the past, and some quarters that have more modest beats, like the quarter we just reported.

Great. Thank you.

Thank you. We’ll go next out to Parker Lane at Stifel.

Hi. It's Max on for Parker. Thanks for taking my question. Can you just kind of if we think about expenses going into 2023, I know you're not guiding for 2023. But is this second half going to be kind of the trough for margins as we look at that year? Will that -- those levels of spending kind of continue?

When we went public, I announced the six-quarter plan to ramp up our go-to-market capacity by about 3x. So we're now through four quarters of that six-quarter plan. And as I discussed in my prepared remarks, we're now fully on track with the hiring that's implied by that plan. Our anticipation is that after this year, you should see incremental leverage in the business as we begin to move toward the long-term margin profile.

Got it. Thanks.

Thank you. We’ll go next now to David Hynes at Canaccord Genuity.

Hey, this is Luke on for DJ, thanks for taking the question. So we're curious, how are you thinking about cumulative cash burn and timeline to breakeven given the revised near term growth outlook, but consistent investment agenda going forward? Thanks.

Sure, I think if you compare our historical cash burn to the strength of our balance sheets, I believe we ended the quarter with north of $200 million of cash on the balance sheet. There is no expectation that we will need to return to the market to raise additional capital for organic purposes. We anticipate being able to get to profitability based on the strength of our current balance sheet. And as I said in response to the last question, our anticipation is that beginning in 2023, you will start to see increasing leverage in the business, now that we've gone through this three axing of our go-to-market capacity this year.

Thank you. [Operator Instructions] We’ll go next now to Mark Schappel at Loop Capital.

Hi. This is Tim Greaves on for Mark. I want to talk with respect to Congruity360, as the user interface for Hold360 and Request360 been updated so to match the Disco's user interface?

So that work is in slide. We did a handful of kind of simpler user interface updates, things like the logo and navigation and off integrations and things like that, shortly after the acquisition closed. We do anticipate a broader sort of version two of the user interface of those products, including deeper integration into the rest of the Disco product suite to unfold over the course of 2023. And of course, like all our products, when we build a product, we think it's always important to maintain R&D capacity on that product. So that we're making continuous improvements inspired both by our vision for the future of the product, but also by the feedback we're receiving from existing customers and prospects in the market.

Okay. Thank you.

Thank you. We’ll go next to Tyler Radke at Citi.

Hey, thanks for taking a follow-up. So Kiwi maybe you could help us understand why these review deals aren't happening? Is it simply because maybe these use cases were for a legal case that got pushed out that was maybe more cyclical? And then just help us understand, are you not anticipating any more of these large review cases to fall in that the second half just help us understand how much you've kind of de-risk the guide from a Disco Review perspective? Thank you.

Sure. So typically, again, we're talking about a small handful of reviews that bill more than a million dollars in a quarter. Those tend to be big ticket litigations of the sort you would read about in the paper. And the timing of them is again somewhat exogenous. It depends on when such a litigation is initiated. When a big due investigation is initiated. It depends on rulings by the court or other decision makers, say, a regulator about the scope of Discovery in the investigation. It depends on the progress or lack thereof in settlement negotiations in the timing of rulings on incremental motions and on the final disposition of the case. So it's a lot dependent on what's going on in the specific legal process. In terms of our guidance, what we have sought to do is to derisk the guidance from the point of view of these kinds of large reviews.

Thank you. And it appears we have no further questions this afternoon. I’d like to turn the conference back over to Kiwi Camara, Co-founder and CEO for any closing comments. Mr. Camara.

Thank you for joining us today. At disco, we will continue our march to be the legal technology leader and make the everyday lives of lawyers easier, smarter and more efficient. We thank you for your interest in Disco, and for joining our Q2 2022 earnings call.

And again, ladies and gentlemen, this concludes today's conference call. We thank you for joining us. Wish you all a great evening. Good bye.