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.

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.

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…

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…

[Operator Instructions] Your first question comes from Scott Berg with Needham & Company. Please go ahead.

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.

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.

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

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.

Got it. That's helpful. Congratulations on the quarter. Thanks.

Your next question comes from Mark Schappel with Loop Capital. Please go ahead.

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?

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.

Okay, thank you.

Your next question comes from David Hynes with Canaccord Genuity. Please go ahead.

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.

Yes, I think that's a really good question, and it's an important one, because I think historically we've talked about customers as if they're all equal, an equal opportunity, equal future ability to grow, equal interest in partnering. And that's not what I've seen in the six months that I've been here. I think there are certainly customers where we have deep, long-standing relationships, but there are also customers who do a small case, buy a small deal, and then aren't with us two months later. I've really asked the team to focus a lot inside those 1441 customers, on who are the ones that we can grow with, who are the ones that will partner with us, who are the ones that look to us for the second case, and the fourth case and the 6th case, because historically, what we know is if we can get a customer to a fifth or a 6th case, that's a sticky customer. And so I've asked the team to look at the customers from a lens of who are the customers we can grow to six cases. It doesn't immediately go one to six, but who's the one we can sell a second to? And if that second one comes, can it lead to a third, and can that put us on a path to a six? So what that's going to mean is from quarter to quarter, I don't know that you look at the customer count as particularly meaningful, but it does matter year over year because we do need to grow customers. And so I take solace in the fact that we're entering 2024 with 9% more customers than we had in the prior year. We're entering the year with 9% more customers, spending more than $100,000. We're…

Yes. Okay, fair enough. Michael, one for you. Do you have software revenue for 21 and 22? I mean, it'd be helpful to see how that's been trending as a percent of revenue, given it looks like it's going to be a new guidance metric.

Okay. The K includes software revenue for '22, for '23. And I'll just tell you what it is on the call now. It's about $112 million. And that is in the K. And you also have in the K the quarterly numbers for '23.

But nothing historically past beyond that.

Nothing prior to '23.

Okay, got it. Thank you, guys.

[Operator Instructions] Your next question comes from Koji Ikeda with Bank of America. Please go ahead.

Hi, Scott. Hi, Michael. Thanks for taking the questions. So just a couple from me here. I think I heard that. I guess it's safe to assume that the third quarter, 2024 EBITDA profitability inflection target is now off the table. But I think you did mention something about 2025. So would that be EBITDA profitable for the full year 2025? Or is that a quarter in 2025 that would show that positive inflection?

Yes. Koji, Scott here. It's a good question and not an unexpected one. What I said precisely in my remarks is that it will put us on a sustainable, and that's an important word to me, a sustainable path of profitability as we move through 2025. So I didn't pick a quarter. I didn't pick the year. What I'm telling you is that I believe a combination of the investments we're making this year, the acceleration in revenue we're seeing this year, and then an additional acceleration as we move out into '25 and beyond, are the things that put us on track for a sustainable path to profitability during 2025. Again, I'm not going to pick the mark. But again, just in case I need to say it on the record. We have to get to profitability. We're committed to get there. I just, as I said, did not want to cut off our ability to grow revenues and to balance the path to profitability. And that's what doing. So as we move into 2025, I think the investments we're making this year combined with accelerating revenue growth will put us on a sustainable path as we move through the year next year.

Got it. That is super helpful. And looking at the guidance it assumes services revenue, which is Disco review, is roughly flat for 2024. So I guess maybe walk us through why it would be flat. And is services revenue going to be a drag on the business going forward? And then the second part of that question is, how is review priced? Because I was looking through prior transcripts and it sounded like it's priced on how many documents are ingested in the platform. So just wondering why it was being put into a different category going forward.

Yes, so it's a good question. So I think the way to think about it is within services you have what I'll call kind of get you up and running in our eDiscovery platform services. And then you have our review services, which leverage our technology. The attach rate of our get you up and running services, our professional services is what we call them, things like ingest and forensics. Those things tend to have a pretty consistent attach rate on our software revenue. I say that, and you could fairly imply that what that means is underneath the covers, revenue is growing in services and down a little bit in review. And that's an accurate directional conclusion for you to reach. The important thing though is it's not because review is going to be, I think you use the word a drag on the business overall. But review has tended historically to be more episodic and it's tended to correlate much more significantly with larger deals, while our services correlate with our software revenue. It doesn't matter. Small deal, big deal. The attached rate is more consistent. One of the reasons we broke out the two numbers is we wanted to give our investors a lot more clarity around the underlying strength of the thing that is key to our business, which is the software. But we will absolutely continue to offer our review services to clients who want that, again, tends to be on the larger deals. I think a really important point though, a lot of the costs associated with our review business are variables. There's very little fixed cost to our business from that. And so we love the big reviews when they come. We fundamentally believe that we can do them more efficiently leveraging our software. We think it's an important offering into a very large addressable market. But again, it's right now the attach rate relates more to the larger deals as we move up the stack, as we develop our sales motion around large laws, or big laws develop our sales motion around corporates. I believe our ability to win those larger deals will improve. And as it does, I think the review attach rate will start to look a little more consistent like our professional services. But as of now, we effectively didn't want to lean into the year on whether that would or wouldn't happen quickly. But again, a key point for you to understand, not a lot of fixed, and I mean like $1 million to $2 million of fixed fees around that business. So not a lot of fixed cost to continue to provide that service where our customers want it.

Thank you, Scott. Thank you for taking the questions.

Your next question comes from Brent Thill with Jefferies. Please go ahead.

Thank you, Scott and Michael, for taking my questions. This is Luv Sodha on for Brent Thil. Wanted to ask one. So obviously, you know dollar retention has declined quite a bit to 92% versus 106% last year. I guess, you know what are the key vectors to drive that back to above 100%? And could you maybe break that down between, say, the volume of cases versus driving up multi-product adoption?

Yes, look, I think for me, the fact that we're coming off a 97% software year is the lowest hanging fruit we've got. Historically, our DNR has been 115%, 120% in the software business. In order to hit the guide, we've got to push that back, to call it 103% to 105% this year, which isn't the goal. The goal is to get back where we've been historically, where we know we can be. But it's just got to be a modest push. And the way that's going to happen is a far greater focus on our existing customer base. And that's why I say that inside that 1441, it's not one large, everybody's the same kind of customer. There are a lot of big law customers in there. There are corporates in there, there are mid-market firms in there. And I think our ability to go and find the right motion in those segments is critically important. And another, I think, really important thing is we went from having a really strong customer success function a couple of years ago to having no customer success function. And Melanie Antoon, and on her team, Justin, the two of them are working well together, have already reestablished that team. And so as I talk about the alignment of go to market in the field, in marketing, sales ops wise, a big part and an important part of that team is the customer success function, the client experience. We've got to get back to understanding who our customers are, what their needs are, and looking, as you said, for the opportunity, what's the next product they could buy from us? What's the next case where we should have the opportunity, can they leverage Cecilia's skills that are in the market. Do they need Case builder to sit across all of their cases? Or one case in particular, the client success rep that we have talking to those customers every week, I think will be critical to that success. And so for me, the fact that we moved from 115% to 120% down to 97% is we frankly took our eye off the ball and the ability to push it back above 100% and back towards historical levels is basic blocking and tackling. And I feel like we've taken the right steps. Again, I caution that we've just rebuilt that function over the last couple of months and we're aligning now around our segmentation. But I fundamentally believe as we move through the year, that alignment and that function in particular are going to be critical to our ability to really rebuild or refresh that DNR number.

Got it. Appreciate that. And just a quick follow-up on the investments that you're planning to make. Scott, I guess which parts of the business are getting this investment? Because obviously, you're getting some efficiency from the additional investments in India. So where are these investments going and how will you track the efficiency of these investments?

Yes, so it's multifaceted. As I said in my remarks, the first investment we made was in our people. Last year was a difficult year for Disco in any number of ways, but it was a year in which, once again, most of our people were simply asked to work harder with little to no reward. As we moved into this year, for the first time in two years, we had a consistent salary increase program. It doesn't really impact our EBITDA numbers, but we also had an equity program that gave everyone in our Company equity, which I think is the greatest thing in the world, to align our employees interests around what's best for the Company. So that's the first and key thing for me, is investing in our people. The second thing is, as I mentioned, we're rebuilding our client success team. We're rebuilding literally from zero, our sales ops team. We're adding about 20% capacity in the field, going from, I think around 30 reps to just under 40, which will allow us to cover more customers as we segment, particularly around corporate and big law. We're making investments in R&D because the flat reality is that most of what R&D is doing today is what will allow us to grow tomorrow. It's not about 2024. It's about Deposition Summaries. It's about the enhancement in our eDiscovery platform. It's about the enhancements in Case builder and in a world where you cut that because it doesn't line up with the current year revenue, you're effectively cutting your nose off despite your face. And so it's investments in R&D that are in future then -- And Michael, I know this one is near and dear to his heart. As you try and scale a business, you can't…

Got it. Thank you so much for the color.

There are no further questions at this time. I will now turn it back over to CEO Scott Hill for closing remarks.

Thank you, Brianna. We appreciate everyone joining us today. 2023, as I just said, was a challenging year for Disco. I want to thank our employees for their resilience and our customers for their forbearance. We're excited about the opportunities we see in 2024. There will be bumps on the road, but our team is aligned and focused. We're committed to returning to consistent double digit growth, committed to disciplined capital and expense management leading to sustainable profitability. We're committed to our customers and to each other. And I have to tell you, I'm excited and proud to be a part of it. As we begin the next chapter for Disco, we look forward to updating you on the progress as we move into our next quarters. And I wish you all a nice evening.

This concludes today's conference call. Thank you for your participation. You may now disconnect.