Ladies and gentlemen, thank you for standing by and welcome to CS Disco's Fourth Quarter and Fiscal Year 2022 Conference Call. At this time, all participants are in a listen-only mode. 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, [indiscernible], 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 fourth quarter and fiscal year 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. 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, our future capital expenditures, our market opportunity and 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 at ir.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 September 30, 2022, filed with the SEC on November 10, 2022 and the company's upcoming Annual Report on Form 10-K for the year ended December 31, 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. And with that, I'd like to turn the call over to Kiwi.

Thanks, Alexi. Good afternoon, and welcome to our fourth quarter and fiscal year 2022 earnings call. Before I dive into our results, I would like to thank all the Disco employees, customers and partners who helped get us here. Disco was founded in 2013. So 2023 is a celebration of our first 10 years in business. In that time, hundreds of Discovians built his company from a lawyer's side project into a leading legal tech company. I am deeply proud of everything we have accomplished. And I'm excited for everything that is to come in our next 10 years. Turning now to our results, revenue for Q4 2022 was 32.5 million and revenue for the full year 2022 was 135.2 million. Adjusted EBITDA for Q4 was negative 11.2 million and adjusted EBITDA for the full year 2022 was negative 44.5 million. In addition to these overall results, we accomplished many great things in 2022. We grew revenue from our original Ediscovery product by more than 30% to more than 105 million. We continue to onboard new customers and expand our relationship with existing customers. We ended the year with over 1300 customers 265 of whom spent over $100,000 with us in 2022 and 23 of whom spent over $1 million. We welcome Discovians back to the office in Austin and London and opened the Disco office in New York City. We completed our first acquisition, adding Disco Hold and Request to our product portfolio. We saw amazing innovations by our product team, including topic clustering with automatic indexing, which enhanced the Disco experience for our global customer base. We launched an emerging leadership rotational program to develop the next generation of legal tech leaders and give us access to a steady stream of junior talent. And we received incredible feedback…

Thank you, Kiwi. In Q4 2022, revenue was 32.5 million, a decline of 4% year-over-year. The year-over-year decline in the quarter is primarily attributable to the smaller matters we saw in review, resulting in lower total revenue. Full year 2022 revenue was 135.2 million, up 18% year-over-year. Full year revenue growth was driven by the addition of new customers and expansion of existing customers offset by a significant contraction in review revenue. Our Ediscovery business finished with revenues north of 105 million, and growth of over 30% year-over-year. We saw a lower revenue growth rate in Ediscovery in the back half of 2022 as compared to the front half. Our dollar base net retention rate as of December 31, 2022 was 106%. This drop from our DNR of 146% last year is primarily due to the ending of large reviews we've previously discussed. While overall DNR was 106%, for Ediscovery, DNR was 120% for the year, demonstrating the resilience of Ediscovery in 2022. And as we've said before, there will be variability in our dollar-based net retention rate based on timing of revenue and the contribution from existing and new customers. 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 Q4 was 76%, up from 74% in Q4 of the prior year, gross margin for fiscal year 2022 was 75%, up from 73% for fiscal year 2021. As a reminder, our gross margins fluctuate from period-to-period based on the nature of our customers usage. 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…

Thank you. [Operator Instructions]. Your first question comes from a line Koji Ikeda with Bank of America.

So I was thinking about or looking at the guidance for this year. And I was wondering, are there any large matters that you're already anticipating to come off the platform this year? And how should we be thinking about the seasonality of growth beyond the first quarter? Anything to call up specifically, the second, third or fourth quarter that we should be aware about?

Koji, there are no specific matters that we're aware of that are big ticket items that will roll off. I do think it's fair to say what we talked about on our last earnings call, which is that in this macro environment, we do have some large customers who come to disco and say, hey, how can you help me optimize my spend? And obviously, we have a few different responses there. The first of which is, we can help you spend less by moving more of your business to the Disco platform across multiple products. But certainly in some instances, we wind up providing discounts to those large customers for whom Disco is a material line item, but no big cases that are scheduled to come off.

Got it. Thank you, Kiwi, for that. And I wanted to follow up with Michael on the comment of the adjusted EBITDA profitability exiting 2024. Just any sort of other color you can provide maybe other that scale and growth driving model leverage, anything specific to call out that could be driving that path to profitability. Thanks, guys.

In light of -- good question, Koji, thank you. So in light of the macro environment, and we've decided to pull forward our path to profitability. We have shown the ability to do this in the past. And with respect to what we're providing color on 2024 exiting the year, adjusted EBITDA positive. I mean, there's obviously a number of different levers that can get us there. And how that will be achieved is going to be based on how things go over the next kind of eight quarters. And so we'll provide updates as we go along each quarter.

Your next question comes from the line of Tyler Radke with Citi.

Hi, this is Kylie Tobin on for Tyler Radke. Thanks for taking the question. Starting off on the generative AI theme and your integration into the Disco architecture. What has the feedback been from those initial beta customers? And how are you thinking about the monetization opportunity long-term? How does this impact the review business and is it built into your margin and guidance outlook for next year? Thanks.

So AI has been a core differentiator for Disco from the beginning. We began investing in an AI Lab eight years ago and have incorporated AI technologies as they've improved in the broader market into multiple product offerings over time, everything from tag scoring and tag predictions to our release last year of topic clustering with automatic indexing. The most recent architectural improvement that you're talking about has delivered a great improvement in both the precision and recall of the language models that we use to help automate and accelerate legal document review. Customers get the benefit of that both in Disco Ediscovery, when they're doing reviews themselves. And when they use Disco Review to buy the ultimate outcome of documents reviewed in legal matters. In short, what this technology is able to do is allow us to review matters with higher quality even more quickly than was done before. Now our review pricing model is generally based on the number of documents submitted. And when review deals are priced that way, an increase in the efficiency of the review redounds to Disco's benefit. On the Ediscovery side, when the customer is doing the review themselves, or using an outside law firm or legal services provider to do the review, the AI translates into increased value that Disco delivers to the customer, because it reduces the amount of their spend on those third-party legal services. Going forward. I think we're just at the beginning of a very exciting time in the integration of generative AI and other AI techniques into Disco's products and we look forward to sharing more product announcements going forward, not only in Ediscovery, but in some of our newer products like Disco Case Builder, and Disco Hold. We have not baked in any incremental AI pricing or incremental AI margins into the numbers that we've guided to. So if we over the course of this year and next year, release capabilities that are independently priced in this area, then we would expect that to be upside to the model.

Thanks. That's really helpful. And just one more on the customer count. We noticed that it dipped a bit off Q3 ending at 1500. Did you see churn this quarter? And if so, was that anticipated in guidance? Or did that full year and customer count fall short of your expectations? Thanks so much.

Hey, I appreciate the question. So customer count actually did increase sequentially from Q3. We also saw increased customer count in the corporate segment. So we're not seeing what you're seeing it definitely went up.

Your next question comes from the line of Jackson Ader with SVB Moffett.

Just curious if we think about, review case that your kind of three largest products Ediscovery, Review and Case Builder. What kind of growth expectations are factored into guidance for each of those for this year?

Well, we don't disaggregate the growth targets by product. I can tell you that we expect that ordering to remain the same over the course of the year. And that from an operational point of view, our main focus is executing on this multiproduct full stack strategy that I talked about as part of our five pillars. We think the right metric for that is a new metric that we shared on the call today, which is multiproduct attach rate measured as the percentage of your end customers who use multiple products over the course of that year. That metric stands at 11%. It's up very materially year-over-year. And our goal is to continue to drive an increase in that metric, both by getting more new customers to land with our second, third, fourth and fifth products, and getting both existing customers and new customers to expand across multiple products as they use the Disco platform for more and more categories of legal work.

Okay. All right. That's fair. And then, if we just think, like we rewind to a couple years ago, can you think about the growth that that maybe you were expecting, at this point in your company lifecycle relative to the growth slowdown that you're actually experiencing? I'm curious how much you would attribute this to -- maybe competitive products, catching up to the capabilities of that Disco enjoyed maybe, again, a couple years ago.

I think it's interesting. We had four quarters of unexpectedly good growth, and then four quarters where we were paying somewhat the penalty of that unexpectedly good growth. An interesting thing to do is to look at the models that we provided around the time of the IPO and compare the revenue number we thought we would be at last year to the revenue number we actually delivered. And so there's a little bit of, we pulled forward some growth, and then we had some slower growth on the back end of that. Of course, we believe that we can and need to and have a plan to reaccelerate growth going forward. And I think the key ingredients to that beyond tightening up go-to-market execution, right? Every opportunity is sacred, expand every customer and so on, all the things I talked about in our five-pillar strategy. Things like extending our reach into corporate, that number of customers is up to 450 and up 35% year-over-year, and then driving multiproduct attach rate that's 11%, up very materially year-over-year. On the competitive landscape, I don't actually think much has changed over the last call it, year, specifically. I think if you go back three to five years ago, there were number of ideas that were new to the market, that Disco championed, and that our competitors, were often skeptical of things like moving to the cloud, things like a focus on the end user experience of lawyers, things like a direct sales model, where we sell directly to the ultimate buyers, whether in legal departments, or at law firms. Things like the reliance on AI and analytics, full stack with products like Disco Review. These were things if you go back, many of our competitors would have been skeptical of them. And now our competitors are embracing them and trying to say we too, are like Disco. So that has certainly changed. And so, we're focused on continuing to deepen our differentiation in those core areas. But I think what we're doing now is again, introducing some ideas to market that our current competitors are skeptical of. This is skating to where the puck is going now. And these are things like our investment in multiproduct and our investment in full stack, the idea that you can build one continuous platform to handle the full spectrum of legal work. And today I discussed five products, handled the full spectrum of work around disputes and investigations. And that you can deliver not only tools, but also the ultimate outcomes through offerings like Disco Review, in my prepared remarks, I talked about how we're beginning to broaden that offering to leverage technologies that we've built in products like Disco Case Builder. So that's where I think, we're continuing to lead the market. And that's how I'd sum up the competitive landscape.

Okay. That was great and thoughtful. Thanks.

Your next question comes from the line of Derrick Wood with Cowen.

Oh, great. Thanks. It's Andrew on for Derrick. Kiwi, last quarter, you talked about increasing investments in marketing CSMs and lead generation, just curious how those are starting to pay off and what kind of channels are most effective in driving new leads?

So if we start with SDRs. So SDRs do, they process inbound leads, and they do outbound outreach, to those warm and cold targets. And we've steadily scaled up the SDR team over the last six quarters as part of our go-to-market scale out. That is sort of unambiguously going very well, both on a unit basis and on an aggregate basis, we're seeing increased productivity from that team that measured in terms of the number of sales accepted leads that they generate. We've also made progress in building specialty SDR teams, for example, an SDR team that is focused on new direct corporate origination. So that's like selling to the General Counsel, Deputy General Counsel, Head of Legal Operations. That's an area where we initially have some skepticism about the prospect of SDR lead generation, just because you might imagine, it's harder to get those sorts of people on the phone through a cold call. But actually, we've built out a corporate SDR team that's been tremendously productive. And that has contributed to some of the metrics we shared on the call, like the 35%, year-on-year growth in number of corporate direct relationships, now up to 450. On the customer success side, we've also seen strong results with that team, setting records both an individual and an aggregate basis in terms of the upsell and cross sell opportunities that they identify. If you think about how we're positioning the CS team for the coming year, we think it can be a huge driver of growth. For example, taking the large number of customers at Disco, that are say under $100,000, in spend, and getting them to double the number of matters that they have in our platform that would blow the plan out of the park, right? So there's a tremendous opportunity for us to do things that shorten the adoption journey for new and existing customers from the historical three to five years or longer, to something much shorter. And we've seen enough customers do it quickly now that we know it can be done. On the marketing side, I think we're earlier in the journey whereby marketing here, I mean things like digital marketing, field marketing, and so on. We're seeing early promising results. And we're scaling our spend based on those results over time. But we expect to continue making progress in those areas over the course of 2023.

Great, thanks. And then, Kiwi, in terms of the quota carrying sales capacity, maybe give us a flavor for -- you've hired a lot over the past one to two years, and you're at a place where you don't need to grow that number much higher, but maybe give us a feel for what percentage of reps are productive currently, and as those reps you've hired ramp cannot help accelerate growth in over this year. Thanks.

Yes. That's exactly our bet. So we believe that as our newer freshman classes of reps go through their ramp that they will contribute materially to growth in 2023 and in 2024. In terms of the newer reps, the way we think about rep ramp is to compare the productivity of the new reps to the productivity of historical Disco reps when they were at similar 10 years of rent, so to say six months, 12 months and so on. Our newer reps are performing well as compared to our historical reps when they were at similar tenure bands.

Your next question comes from the line of Brent Thill with Jefferies.

Hi, this is Luv Sodha on for Brent Thill. Michael, maybe first question for you. Could you just give us some color as to what is baked into the guide? Are you baking in a higher than historical level of conservatism. And then, you mentioned that the Ediscovery growth did slowdown in the back half of the year. Are you baking that into what you're guiding for next year?

Yes. Luv, thanks for the question. So there's a lot that goes into our guidance. And as I said in my prepared remarks, if you look at the last couple of quarters, the guidance obviously implies a reacceleration. And it's a combination of Ediscovery review and just the overall business. I wouldn't read more into that, other than that.

Got it. And I guess, on that point, Kiwi, what gives you more confidence that you can reaccelerate growth? Is there anything internal in terms of execution? Or do you feel like you have the resources you need to drive better growth over the next year?

I do. Over the last six quarters, we more or less stuck to our guns, in terms of investing in the scaling out of the company to go pursue the five pillars strategy that I've been talking about. And that was true in every function, both R&D, and S&M. Now, we're very focused on helping those new team members go through their ramp and become productive as they contribute to growth in 2023 and 2024. In response to one of the earlier questions, I gave you some color in terms of how the SDR, CSM and quota carrying sales rep teams are doing. I think zooming out from that color, and thinking about some of the underlying metrics that can help analysts and investors understand our business. We pointed to a number of things in our prepared remarks. First, we continue to experience strong customer growth, up to more than 1300 customers today. We also continue to grow customers at the higher spend levels 265 customers spending more than $100,000 with us last year, and 23, spending more than a million. And we're succeeding at penetrating the market with a decision makers who control the largest legal budgets. That is the general counsel of large enterprises. We're up to 450 Direct corporate relationships, a number that is up 35% year-over-year. Then our multiproduct and full stack strategy is working with 11% multiproduct attach rate up materially year-over-year, but also low enough that there's tremendous room to expand that multiproduct attach rate and for expansion of that multiproduct attach rate to be a material driver of growth. And then of course, our original product, Disco Ediscovery still makes up a large majority of our overall revenue north of 105 million for last year, up 30% year-over-year and importantly with 120% dollar based net retention. So both at the micro level in terms of what we're seeing in execution on the teams, and also zoomed out at an operating metrics level. I think there are many reasons to be optimistic about the prospect for reaccelerating growth in our business.

Your next question comes from the line of Robert Morelli with Needham.

Hi. This is Rob stepping in for Scott Berg here. Thanks for taking my question. When you look at bookings of the last two quarters, or the pipeline into fiscal year '23, as the composition of modules changed much versus the beginning of the year.

No.

Got it. Okay. And then, just given the legal litigation industries are lightly sensitive to economic movements, how should we view the drivers to why customer would slowdown or accelerate the decision to replace their existing legal tech platforms in the softened macro? Thank you.

I think the impact of the macro in our business has puts and takes. And so on the one hand and I talked about this earlier, when you have very large Disco customers and their spend with Disco is material line item in the current climate, there's pressure to go reduce that spent. And so we have to work with those customers. Sometimes we succeed at maintaining or expanding their spend other times we provide discounts. And of course, we try to extend deals and do things like that in connection with providing discounts, but that's definitely a headwind created by macro. Additionally, at Disco, we are much less likely to engage in pilot to new software products or otherwise undertake new programs. And so then generalized resistance to the new that is created in times of macroeconomic stress is also a headwind to acquisition of new logos. I think on the tailwind side, we have a product that delivers ROI by reducing and making more predictable and material line item is spent, which is the cost of bill by the hour that professional services and lawyer time in handling what are often very large and very impactful disputes and investigations for large enterprises. Put more simply, we help General Counsel save money. And so that is a tailwind in a time where suddenly many of our customers are much more EBITDA focused than they would have been two years ago. How do these puts and takes shakeout? I think it's a little bit hard to say. But that's some of the color that we're hearing from customers and experiencing in the field.

Your next question comes from the line of Parker Lane with Stifel.

Hi, this is Matthew Kikkert on for Parker. Thanks for taking my questions. Could you talk a bit about your acquisitions hold and request, how those integrations progressed? What's the traction been like? And have you been surprised by anything with those solutions so far?

We're pleased with the success of the integration both from an engineering and product point of view. And from the go-to-market point of view. I wouldn't say we've been surprised, I think the acquisition has played out more or less in line with a case that was made internally to justify it. And so what was that case? We think, first, that we added a number of great enterprise customers who were preexisting hold and request customers. And second, we opened the door to a new kind of conversation with both existing Ediscovery, Review and Case Builder customers and prospects who are entirely new to the Disco ecosystem. So there are many conversations we're having now, with some of those corporate new logos that I talked about, where the product they're landing on, is hold or request. Or even if they don't start by buying that that's a driver of the first conversation. Maybe they start with one of our other products, say Ediscovery or review or Case Builder and expand the hold and request over time. So I think if you take a step back, hold and request are great components of two of our five pillars. First becoming the platform of choice for General Counsels. These are technologies that are principally used by the GC and in-house lawyers. And second, our pillar around multiproduct and full stack. These two products enable us to deliver a really end-to-end solution, handling all aspects of litigation, investigations and other kinds of legal disputes.

Your last question today come from the line of DJ Hynes with Canaccord.

Hey, guys. This is Luke on for DJ. Thanks for taking my question. So going back to that customer count question, correct me if I'm wrong on that, but I'm calculating nine net new customer additions this quarter, going from 1327 or 1318 to 1327. And that's down from average net adds of 55 in the prior three quarters. Now, that's a pretty significant drop off, especially after having just finished tripling sales capacity here. So I guess the question is, is there some increased churn component? Is it just becoming more difficult to add new customers in this environment? Or is this just sort of an outlier quarter?

I think it's early to say whether it's an outlier, quarter or not. And I talked about some of the not really specific to Disco but generic headwinds that the macro environment creates in terms of adding new customers. I can say in terms of color that it doesn't feel like something has fundamentally changed. But of course, we'll see over the next few quarters as that continues to play out.

Okay. And then, maybe just on your EBITDA guidance, it implies a pretty significant decline in [indiscernible] over the course of the year. Can you just talk a bit about I guess what levers you have to pull to hit that target. And then, whether or not a lot of that work has already been accomplished, sort of with this rep in Q1? Thanks.

I think Michael answered a version of this question earlier. So I'll give you, my thoughts. Hopefully, they're additive. I think the big difference in the guidance we're providing is that we've pulled forward and made a commitment around path to profitability. And that commitment is manifested in our EBITDA guidance for full year '23 in the commitment to be in mid-teens, negative EBITDA in Q4 of '23. And then to have positive EBITDA exiting 2024. Now, in terms of how we get there, there are four big levers. Number one is, of course, we accelerating revenue growth. And I've given lots of reasons why we think there's a reasonable prospect of reaccelerating revenue growth. Number two, which we talked about a bit in the prepared remarks, is that we think there are further opportunities to optimize our infrastructure spend, both on the development environment which hits R&D OpEX, and in the production environment, which hits COGS, so we think there may be upside to gross margins going forward as we make those optimizations. Then on the OpEx side, think about staff and non-staff. In terms of staff, the general strategy is over time to increase our mix of global talent and homegrown talent relative to our earlier mix, which we believe will reduce the unit cost of talent over time. Then, on the non-staff side, we're of course, taking a sharp pencil to every line item of non-staff expenses, with a particular focus on expenses, like certain items of software that have historically scaled with headcount. Now the exact mix of those four components that we use to attain our profitability commitment that's going to unfold as we see how the business progresses over the course of this year. But net of everything, what we're saying today is that we're committed to achieving the profitability targets that we've discussed on the call. This concludes our question-and-answer session for today. I would now like to turn the call back to Kiwi Camara, Co-founder and CEO. Thank you.

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 fourth quarter and fiscal year 2022 earnings call.

This concludes today's call. Thank you for attending. You may now disconnect.