Ladies and gentlemen, thank you for standing by, and welcome to CS Disco's Third Quarter of Fiscal Year 2024 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 speaker's 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, Head of Investor Relations, Aleksey Lakchakov. Please go ahead.

Good afternoon, and thank you for joining us on today's conference call to discuss the financial results for Disco's third quarter of fiscal year 2024. With me on today's call are Eric Friedrichsen, 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 the impact of changes to our executive leadership, our future capital expenditures, market opportunity, market position product strategy, and growth opportunities. The benefits of our product offerings and developments in the legal technology industry, including those related to the role of artificial intelligence. 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 titled Risk Factors in the company's quarterly report on Form 10-Q for the quarter ended June 30, 2024, filed with the SEC on August 8, 2024, and the company's upcoming quarterly report on Form 10-Q for the quarter ended September 30, 2024. 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 in using non-GAAP measures versus their closest GAAP equivalent is available on our earnings release. And with that, I'd like to turn the call over to Eric.

Hello, everyone, and welcome to Disco's third quarter of 2024 earnings call. I'm excited to review our results today and to dive into our forward-looking strategy. Total revenue for the third quarter of 2024 was $36.3 million, up 4% versus the same quarter last year. Software revenue in Q3 was $30.2 million, up 6% over the prior year. Adjusted EBITDA was negative $4.5 million, or negative 12% adjusted EBITDA margin. We are pleased with our performance in Q3, and we continue to make progress on the initiatives that we have previously discussed, along with some new ones that I will highlight on this call. Q3 marked my first full quarter, and just last week, I celebrated my six-month anniversary as Disco's CEO. In the last quarter's call, I shared how my confidence in our product was very high and it has only grown since. I've had the opportunity to meet face-to-face with over 40 customers, including lawyers and eDiscovery leaders from Am Law firms and large corporations across the US and the UK. These conversations have further reinforced my belief in the value that Disco delivers. With our powerful eDiscovery tools and the advanced capabilities of Cecilia AI, Disco stands out as the best platform in the industry. Our customers affirm this. They love Disco's intuitiveness, accuracy and speed. Time and time again, I hear how Disco drives meaningful value by boosting efficiency, reducing costs, and most importantly, empowering lawyers to improve legal outcomes for their clients. Our customers are energized by Disco's new strategic direction, our strengthened leadership and the cultural growth that we have demonstrated. Many of them are eager to expand their engagement with us. However, to get our product into the hands of more legal professionals, we need to continue to improve in the three primary…

Thank you, Eric. In Q3 2024, total revenues were $36.3 million, up 4% year-over-year. Software revenues were $30.2 million, up 6% year-over-year. September saw an especially strong software usage net inflow. Services revenue were $6.1 million, down 7% year-over-year, predominantly driven by review usage. 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 Q3 was 74%. As we mentioned before, 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. Sales and marketing expense for Q3 was $13.8 million or 38% of revenue compared to 44% of revenue in Q3 of the prior year. The year-over-year decline is predominantly driven by a combination of lower total headcount and redistribution of our investment within sales and marketing. Research and development expense for Q3 was $11.1 million or 31% of revenue compared to 29% of revenue in Q3 of the prior year. The increase was driven by both domestic and international headcount. General and administrative expense in Q3 was $7.7 million or 21% of revenue compared to 19% of revenue in Q3 of the prior year. Leadership changes in Q3 2023 reduced G&A expenses in that quarter. Operating loss in Q3 was $5.6 million, representing an operating margin of negative 15% compared to negative 17% in Q3 of the prior year. Adjusted EBITDA was negative $4.5 million in Q3, representing an adjusted EBITDA margin of negative 12% compared to an adjusted EBITDA margin of negative 13% in Q3 of the prior year. Net loss in Q3 was $3.9 million or negative 11% of revenue in line with Q3 of the prior year. Net loss per share for Q3 was $0.06 in line with Q3 of the prior year. Turning to the balance sheet and cash flow statement. We ended Q3 with $126.8 million in cash, cash equivalents and short-term investments and no debt. Operating cash flow for the first three quarters of 2024 was negative $10.8 million compared to negative $28.7 million in the same period of the year prior. Turning to the outlook. For Q4 2024, we are providing total revenue guidance in the range of $35.2 million to $37.2 million and software revenue guidance in the range of $30 million to $31 million. We expect adjusted EBITDA to be in the range of negative $7.6 million to negative $5.6 million. For fiscal year 2024 we anticipate total revenue guidance in the range of $143 million to $145 million and software revenue guidance in the range of $119.4 million to $120.4 million. We expect adjusted EBITDA to be in the range of negative $22 million to negative $20 million. Now I'd like to turn the call over to the operator to open up the line for Q&A. Operator?

[Operator Instructions] Our first question comes from the line of Koji Ikeda with Bank of America. Your line is open.

Yes. Hey, guys. Thanks so much for taking the question. I wanted to ask a couple here. Maybe the first one on the new Chief Sales Officer. Realizing – I think she's coming back to DISCO. And so thinking about how the company has evolved over the last couple of years and the product itself has evolved over the last couple of years. I'm just trying to think of what sort of further evolution she might drive in the go-to-market from here?

Yes. Thanks, Koji very much for the question. I am so excited to have Lauren Caruso join us at DISCO as our Chief Sales Officer. I mentioned, when I got on board that I was going to evaluate our management team and look for opportunities to bring in new talent. And when I decided that we needed a new Chief Sales Officer, I put a lot of time and effort to make sure that we defined the criteria very quickly and closely and that we looked at a lot of different candidates. And so I'm sure you can probably imagine with my background, I have a great network of extremely strong sales leaders. And so we spoke with many of them and we also spoke with several other potential sales leaders outside the organization and ultimately determined that Lauren was a perfect fit for us. So Lauren was one of our top sales leaders at DISCO in the past. She's got a very enterprise-oriented mindset. So she worked with some of our biggest customers in the past. She's very strategic in her thought process and she knows eDiscovery and specifically DISCO inside and out. So she knows our products extremely well, she knows our client base extremely well. So I'm thrilled to have Lauren on board. And look, I'm still overall responsible for the revenue for this organization. As you know, I've got a lot of go-to-market experience in my background. Lauren will be reporting directly to me as our Chief Sales Officer. Sales is obviously an extremely important part of our revenue, but it's not the only important part of our revenue. Our Head of Customer Success and Services reports directly to me our Head of Marketing and Demand Gen reports directly to me. And so I'm going to keep a close pulse on the opportunity and make sure that we're doing everything we can to increase our revenue but I'm thrilled to have Lauren on board as our Chief Sales Officer.

Got it. No, thank you for that. And I wanted to ask another question here on the restructuring. Just maybe from a big picture perspective any way to categorize how big it was? It sounds like there was some in the sales organization that was affected. Was that the only organization within Disco that was affected? And are you targeting to end up the full year with a lower headcount than starting the full year? Thank you, guys.

You bet Koji. So, in terms of the restructuring, first of all, those kinds of things are never easy to do as I'm sure you know. We had to say goodbye to some people that we care a lot about who helped Disco get to where we are today and contributed significantly. So, that part is tough. But as I said before, I committed to this organization that when I came on board, I would quickly balance the urgency along with learning the business, developing our strategy and then determining where we needed new talent. That's from an organizational structure standpoint, a role standpoint and then just a pure talent and experience standpoint. So, I made the decision that we needed to make a change. In terms of scope, 31 people were affected. So 31 people, we let go this week. At the same time, we opened up 22 new roles at Disco on the same day. So this is clearly not a cost-cutting action, this is all about refocusing our resources, our efforts, our investments where I think we're going to best grow and what's going to be best for the company moving forward. And so sales was a fairly significant portion of that not half, but a reasonably significant portion of that. Most of the people in the sales organization by far were either in our sales development team or in our inside sales team. And then we opened up 10 enterprise regional sales executive roles. So, we're bringing in experienced enterprise-oriented salespeople.

Got it. Thank you. And just one last question if I may here. I don't think I heard a customer count metric. You typically do give that. Any color or if you could get that metric? Or if we can't any color on if it's higher or lower than where you ended up in the second quarter? Thanks guys. Thanks for taking the questions.

Yes you bet, Koji. So, our customer count at the end of -- or in Q3 was 1439 customers which is relatively flat for the year. It's down 10 quarter-over-quarter. As you know our customer count will fluctuate. The reason I didn't talk about customer count though is because it's just not the metric that we're focused on. I know in the past, Disco was focused on acquiring customers sort of regardless of how big or small they are. Our focus right now is clear. We are focused on acquiring and growing within customers that we believe have a lot of opportunity, where we can add value and where we really think they can grow. And for us, that is large corporations that are in highly litigious industries. That is large law firms Am Law 200 firms or large litigation boutiques that have big centralized eDiscovery teams that work in practice areas that generate a lot of eDiscovery work and therefore they have a lot of eDiscovery needs. And so that's where we are putting our focus today and that's really more of the way we're thinking about it. So in terms of -- the good news there is that we're seeing some progress. We had more customers that spend $100000 per year with us than we did the quarter before. We had more revenue from that same exact cohort of customers that spend $100000 or more per year from us. We've got record usage of our platform. Our dollar net retention for software also went up quarter-over-quarter. And overall our revenue went up. So, those are some of the things that we look at.

Thanks for taking the questions.

And your next question comes from the line of Brian Essex with JPMorgan. Your line is open.

Hi, good afternoon and thank you for taking the question. I was wondering maybe to start if you could talk about Cecilia and what the plans are for that platform, particularly with regard to accelerating your penetration within customers and monetizing that platform as customers might find a lot of value with it?

Yes. Thanks Brian. I'm very excited about the future of Cecilia AI, our AI platform. I mean just in general AI has been part of our core eDiscovery platform for more than 10 years. So we've got great traction around AI. Cecilia which is our generative AI platform has a lot of potential. Keep in mind that lawyers are not always the fastest industry to adopt new technology but we've built Cecilia AI with that in mind. So there's a number of things that we've done around the platform to ensure that we get good adoption and the feedback we've gotten so far is really strong. So for example, we have the most secure platform in the industry. We've got the ability where we tag every single document and explain why we tag every single document. When users are writing queries we provide services along with it to help our customers learn how to write prompts for AI and get the best experience out of that. We measure the effectiveness of our solutions by looking at the recall rates and the precision rates and we provide that data to make the results ultimately more defensible. So we've built our platform specifically to help a conservative industry be more likely to adopt our solutions. And look the feedback we're getting so far is extremely positive. We were with one of the largest law firms in the country in the U.S. last week and they are a big user of the ediscovery platform of our biggest competitor and they wanted to see our generative AI solution. We showed them Cecilia and they said it was light years ahead of our competitors' solution. And so they are now evaluating the idea of using the Cecilia AI platform. And along with that moving some matters over to DISCO. So that's just an example. We certainly have gotten traction. We've acquired customers. We've got many customers that are starting to use the system. But the reality is still for this year -- for the next few quarters it's not going to be a material effect on our revenue. And so that's kind of where we're at right now.

That's super helpful. And maybe just a quick follow-up, I understand you do still have a lot of cash on your balance sheet and you've kind of rolled up your sleeves. You're reorienting the sales force and making some headcount changes. But any sense of when you might have line of sight into offering an operating model or some gauge of when we might expect the cash flow breakeven just to kind of get some goalposts around what direction the target model might run in?

Yeah. Brian, let me tell you the way, I think about profitability. First off our number one goal is to accelerate our growth. The TAM in this market is billions and billions of dollars and our goal is to accelerate our growth and get as much of that TAM as we can. In mind if I look at where our cost structure is today I'm more inclined to shift our focus, rather than just continually add cost to our structure. I believe next year we will grow our revenue at a faster pace than we did this year. So far this year, if you look at how we've performed year-to-date along with what we have guided for Q4 our growth rate will be more than double what it was last year. And look I think we're on the path that we can increase our software -- that's our software growth rate that we can increase our software growth rate next year even further. I do think our expenses will go up next year but our expenses will not go up as much as our revenue. So the reality is this is more about shifting our focus shifting our resources and our investments than it is adding cost to the model. And ultimately we're working our way towards sustainable profitability. So we're making investments in our go-to-market and our sales enablement our customer success by shifting funds rather than just adding a lot of expense to our model.

Got it, very helpful context. Thank you.

And your next question comes from the line of Mark Schappel with Loop Capital. Your line is open.

Hi. Thank you for taking my question. Eric, besides the sales heads that were let go during the quarter I was wondering if you could just go into a little greater detail around some of the go-to-market changes that took place during the September quarter?

Yeah. We had already started making some shifts and focus as you know to work on -- to assign more resources to our larger accounts. So from a sales perspective that means putting experienced salespeople on larger accounts that we believe have -- from what we've modeled have big ediscovery wallets and our goal is to go gain more wallet share there. We started shifting more of our sales development resources to those same accounts. And from a marketing standpoint, we started to build an account-based marketing sort of an integrated marketing model, so that we can put more focus on the customers that we think have the most opportunity both acquiring those customers and growing those customers. To do that we needed to add some new talent, so as I mentioned in my prepared remarks we've added now three very experienced sales leaders so a couple more in addition to Lauren that are more enterprise-oriented and very seasoned leaders within this marketplace. We've added a number of salespeople as well in the last quarter. And then we've started to add various expertise in our marketing organization as well.

Great. Thank you. And then during your prepared remarks you noted that you're seeing increased interest and involvement in longer-term opportunities. I'm wondering if you could just expand on that a little bit?

Yes, we're getting invited to the table. So in this industry as I mentioned it's a very large industry and it is a growing industry. We're $140 million approximately revenue company in multiple billion-dollar industry. So there's a lot of opportunity for us to go gain more share or more opportunity. And the thing that we need to do is to market ourselves better within our large existing customers. And so when I'm out speaking with customers I'm asking them questions about what we need to do to expand our presence to do more eDiscovery work and for them to use our platform for more and more of their matters and for larger matters. And the feedback that I'm getting overall is that we need to do a better job marketing. We need to do a better job educating our customers about the services that we offer that are so important for example to them as they're working with larger matters with us. And then just the scope of the large matters. We've had hundreds of multiple terabyte matters that we've done at DISCO and some of our customers don't know that. So a lot of this is about education and so we're doing less of a broad-based marketing approach and more of a specific one-to-one, one-to-many type marketing approach. One-to-few I should say.

Thank you.

[Operator Instructions] Our next question comes from the line of Ian Black with Needham & Company. Your line is open.

Hi. As you guys move upmarket should we expect higher usage of Cecilia AI?

You know, we're getting a lot of interest from Cecilia AI from our larger customers. If you think about when you've got a very, very large matter your ability to navigate that matter very quickly to be able to research the matter to be able to ask the right questions when natural language becomes important. And then clearly larger matters mean larger reviews. And our Cecilia auto review solution because it's so fast and it can act as if it was a 140-person managed review team can be very, very helpful in those larger matters. So I think there's a lot of interest among our biggest customers in our Cecilia products. But again we're still in the relatively early stages and I want to temper expectations in terms of how fast that part of our business is going to grow.

Thank you.

And there are no further questions at this time. I would now like to turn the call back over to the CEO, Eric Friedrichsen.

Thank you. I appreciate it. And really thank you to everybody for joining us today. We are making strides all the way across the business anywhere from advancing our product capabilities to strengthening our team and we're delivering results that position us for long-term success. I'm encouraged by the green shoots that we're starting to see and I'm 100% confident that we have a solid plan for success. Our focus remains on driving innovation, improving execution and capitalizing on the opportunities that we've got ahead. So we're excited about the progress. We're excited about what we've done so far and what's coming next and I look forward to updating you in the quarters to come. Thank you.

This concludes today's conference call. You may now disconnect.