Ladies and gentlemen thank you for standing by, and welcome to CS DISCO's Fourth Quarter and 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 like to now 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 fourth quarter and 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, our future capital expenditures, market opportunity, market position, product and go-to-market strategies, and growth opportunities, and the benefits of our product offerings 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 of 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 30th, 2024, filed with the SEC on November 6th, 2024, and the company's upcoming annual report on Form 10-K for the year ended December 31st, 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 of using non-GAAP measures versus our closest GAAP equivalent is available in our earnings release. And with that, I'd like to turn the call over to Eric.

Good afternoon, everyone. I am pleased to report a strong end of the year for DISCO as we continue to make progress in growing the reach of our platform and extending our relationships with top-tier law firms and corporations. Software revenue for fiscal year 2024 was $120.1 million, up 7% over the prior year. Services revenue, which include revenue from DISCO review and professional services, was $24.7 million in fiscal year 2024. Total revenue for fiscal year 2024 was $144.8 million, up 5% over the previous year. Adjusted EBITDA for fiscal year 2024 was negative $18.7 million, an improvement of $7.2 million from the prior year. And we ended the year with $129.1 million of cash and short-term investments on our balance sheet. We ended 2024 with 315 customers who each contributed more than $100,000 in total revenue, which was up 9% year-over-year. Revenue from customers that contributed more than $100,000 in total revenue grew at more than double the rate of those customers contributing less than $100,000 in revenue. We finished the year with 19 customers contributing more than $1 million in revenue, while our multi-product attach rate was 17% at year-end, including Cecilia. Our total revenue, dollar-based net retention, or DNR, improved year-over-year from 92% to 96%, and our software DNR improved year-over-year from 97% to 100%. Over the past few quarters, we've seen an increase in the usage by our more than $100,000 customers. We believe that the actions that we are taking to transform and enhance our go-to-market approach, which I discussed at our last earnings call, are just starting to bear fruit. We are very excited about 2025 and focused on continuing to demonstrate further go-to-market improvement and success. During our last earnings call, I discussed three areas of focus for DISCO. Number one, becoming…

Thank you, Eric. In Q4 2024, total revenue was $37.0 million, up 4% year-over-year. Software revenue was $30.8 million, up 5% year-over-year. Services revenue was $6.2 million, down 4% year-over-year, predominantly driven by review usage. Full-year 2024 revenue was $144.8 million, up 5% year-over-year. Software revenue was $120.1 million, up 7% from prior year. Services revenue was $24.7 million, down 4% year-over-year, due to a year-over-year decline in review revenue. In discussing the remainder of the income statement, please note that unless otherwise specified, our references to 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 75%, and gross margin for fiscal year 2024 was 75%, in line with fiscal year 2023. 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 Q4 was $13.9 million, or 37% of revenue, compared to 36% of revenue in Q4 of the prior year. For fiscal year 2024, sales and marketing expense was $56.7 million, or 39% of revenue, compared to 45% of revenue for fiscal year 2023, a decrease of over $5.4 million year-on-year. The decrease was primarily driven by a decrease in personnel costs and a reduction in marketing spend. Research and development expense for Q4 was $11.9 million, or 32% of revenue, compared to 24% of revenue in Q4 of the prior year. For fiscal year 2024, research and development expenses were $43.8 million, or 30% of revenue, compared to 31% of revenue in fiscal year 2023, an increase of over $1.5 million year-on-year. This increase was primarily driven by an increase in research…

Thank you. We will now begin the question and answer session. [Operator Instructions]. Your first question comes from a line of Koji Ikeda from Bank of America. Your line is open.

Hey, guys. Thanks so much for taking the questions. I wanted to ask about maybe the selling environment in legal tech and specifically on AI tools. Is it potentially getting harder selling AI legal tools today versus maybe a few years ago? And the fact that it seems like there's a lot of tools out there now. And when we see that within software categories, it tends to cause a lot of confusion with buyers. And so maybe help us understand what is the selling environment like and what is the key feature or value prop today that is driving new customer adoption?

Eric, Koji, thank you very much for the question. I really appreciate it. I would say that the selling opportunity within the legal industry actually has gotten a little bit easier more recently than it has in the past in terms of their interest or willingness to look at various AI tools. I think you know that DISCO has had AI built into our platform since almost the inception of the company several years ago. But the generative AI solutions obviously are much newer within the last 18 months. We've seen pretty incredible adoption over the last year of our Cecilia products. And keep in mind that our Cecilia products are very specific to the use cases that we are trying to solve for. So if you think about Cecilia Q&A, it's all about asking questions of the facts in the database to help our customers do early case assessments for their clients, to help them very, very quickly get to the facts of the case that are the most important. And we had a customer that I heard about actually just today, who leveraged Cecilia Q&A to help analyze the facts of the database to determine the best questions that might come up during a trial and help prepare the people in the trial to be able to answer questions from the opposing counsel and really nailed it. So our Cecilia products are offering very, very specific solutions as opposed to general solutions. And they leveraged Gen AI to do that. The other one is Cecilia auto review, obviously, that does the first pass review of the database. And again, it's very much tailored to that exact process. We've designed it such that the results can be very defensible. We look at the precision rates, the recall rates, every document that gets tagged, we explain why it got tagged. And all of this provides a very, very specific solution for our customers problem.

Got it. No, thank you so much. That's very, very helpful. And a follow-up here. I think I heard on the call, if I heard this correctly, there's a target out there setting a target for breakeven adjusted EBITDA by the fourth quarter for '26. I mean, is this a hard target? And what I mean by that is regardless of where growth ends up, is the business willing to do what needs to be done to achieve that breakeven EBITDA target in 4Q '26. And once that is achieved, is it safe to assume that adjusted EBITDA should be positive from there on out on an annual basis? Thank you.

Koji, good question. So we're really confident in our strategy and our kind of reshift on focusing on large customers and the guidance range we provided in 2025. We obviously haven't provided revenue guidance for 2026. Our goal, and we've been talking about this consistently, is working towards sustainable profitability and growth long term. We've reallocated our investments in areas that we believe will make the biggest impact to drive revenue growth, especially around our targeted customers. By focusing on larger customers, it's going to enable us to grow more efficiently. And our current cost structure with really modest increases, we believe, will support the business as we drive revenue growth. Look, there's many ways to get to positive adjusted EBITDA. And while there are many ways to get there, I'm confident in our strategy to grow revenue and to achieve sustainable profitability and to hit that target at the end of next year in Q4.

Thanks, guys. Thank you so much.

You bet.

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

Hi, this is [indiscernible] on for Brent Thill. Thank you for taking the question. The improvement in overall dollar net retention, do you see that number going above 100 again? And if so, can you talk about the vectors that are out there, so volume versus multi-product adoption?

Yes, sure. Look, in terms of our improvement in DNR, I'm very pleased. I think we probably included mostly salient points within the prepared notes, but our software retention got back to 100% from 97%. Our total revenue retention went from 92% to 96%. And that software, that improvement was really driven by our larger customers, by those that spend more than $100,000 with DISCO. So I'm confident that with our go-to-market approach, we have the opportunity to continue to improve DNR over time.

Got it. That's super helpful. And then, can you all just talk about the level of conservatism that you're embedding into the guide for 2025?

I'll take that. Let me just discuss guidance. So the guidance that we're providing for the full year and also for Q1, it's the best estimate of where we think things are going to land in the quarter and for the full year. I'm really confident in our overall strategy. We do believe that it may take a bit of time to see some of the results from the actions we're taking as we focus on larger customers. You didn't ask about Q1 guide, but I'll just mention part of the Q1 guide includes volatility in the review component of services, but I am confident in our overall strategy and our guide for the full year.

Great. Thank you.

[Operator Instructions]. Your next question comes from the line of Mark Schappel from Loop Capital Markets. Your line's open.

Hi, thank you for taking my question. Eric, I jumped on the call a bit late here, so I apologize if you've already addressed my question in your prepared remarks, but I was wondering if you'd just spell out your investment priorities for the coming year?

Yes. Hi, Mark, nice to hear from you. Very clearly, we are invested in growth. We have determined exactly who we think our ideal customer profile is, the exact types of matters that we believe. We are the most successful with, that we can help our clients the most with, and to create the most opportunity to accelerate revenue for DISCO. So that's really where we're putting our investment. In terms of go-to-market, we've got, from a sales perspective, we shifted significant investment over the last quarter from account executives and sales development representatives over to enterprise sales reps. So we've beefed up our enterprise sales staff. We have restructured and enhanced our sales leadership. From a marketing perspective, we have pivoted to more of an account-based marketing strategy that's very much focused on targeting our top accounts, those that we think have the most opportunity and that can grow. And then from a customer success standpoint, we've really started to rebuild our whole customer success function. One of the things that I included in my prepared remarks was a discussion about how we've changed the roles for our sales and customer success teams. Our salespeople have traditionally been more of account managers to really kind of manage the book of business. And what we have done now is we've restructured their roles so that salespeople are very much focused on going to go get the next matters and going to sell the next products and really expand the relationship with our customers, while our customer success team is responsible for customer satisfaction, responsible for adoption of our products, responsible for renewals and retention of those particular customers. And therefore, we've also reset our compensation strategy and comp plan for our salespeople to really, really incentivize them to help grow accounts. From a product standpoint, we're doubling down on our core ediscovery products and our Cecilia generative AI products. That's where we're putting the vast majority of our investment when it comes to product.

That's helpful. Thank you.

Thanks Mark.

Your next question comes from a line up, Brian Essex from JP Morgan. Your line is open.

Hi. Good afternoon. Thank you for taking the question. Hi. Great to see the large customer growth on the platform. And I guess if I could maybe just pivot back to the question that was just asked and some of the color you provided on go-to-market changes, particularly among the sales force. Can you help me understand how much account addition or change was there associated with those changes? And as these sales reps kind of assume new functions in a more, I guess, sales-focused role, how mature would you say they are? I'm trying to get to a level of maturity, particularly with regard to executing on the platform and when you think they might reach full maturity and when we might see better productivity in the numbers? And then I have a quick follow-up.

Okay, sure. Well, I think the first thing I would just say is that I'm already very pleased at the early results that we've gotten in our penetration for larger customers. Our number of customers who spent more than $100,000 with DISCO last year went up by 9%. The amount of revenue generated from that same group of customers that spend more than 100,000 of us grew at more than double, significantly more than double the rate. In fact, the vast majority of the growth that we had last year came from that segment. So that is, we're already starting to see some progress with our focus on those largest customers. In terms of the team, we've already hired a number of new enterprise sellers. We still have some rolls open that we're hiring for, but I feel like we are adequately staffed at this point. The biggest change that we needed to have really was to free up time from our salespeople to stop doing account management and to put all of their focus and effort into selling. So that was the main shift. So a lot of that was done by shifting workload to customer success reps. Some of it has also been done by the operational improvements that we've put into the business.

Got it. Is there like, I don't know if you had to gauge it, an average level of maturity you would assign Salesforce and then how long it would take to get them to full maturity productivity?

I don't have a specific metric to share around that.

Okay, that's fine. And then maybe just to follow up on the guidance commentary, it seems like a bit of a wider range of guidance, particularly on the top line that you've offered this year. I guess how would you bring your approach to guidance? I know you said you were confident in your ability to execute to that level, but what would be the primary governors of achieving the upper end of that guidance range?

So it's a fair question. I don't believe the range this year is really any different than the range that we provided last year at this time for '24. In terms of the confidence, what we talked about a little bit is, and what I previously mentioned, is there's a shift in strategy. And as a result of that shift in strategy with the focus on larger customers, we do believe that that's going to lead to and drive us to revenue reacceleration at a faster rate than the old approach that we used to have. That could take a little bit of time. We're not exactly sure when that's going to move in completely in the direction, but we are really confident that the strategy is going to work. We already have seen signs of it working, and I believe there's a lot of upside from our focus on large customers. As you can see just from the metrics, the large customer count grew 9% year-over-year, and the contribution of our growth from the larger cohort has been very significant as opposed to the tail. So it's really a shift. I believe there's a lot of upside.

Got it. That's super helpful. Thank you so much. And my area does look like the same range, so I apologize for that. But thanks for the color. Appreciate it.

Your next question comes from a line of Ian Black from Needham & Company. Your line is open.

Hi, Ian.

Hi. Yes, you guys called out a 17% multi-product attach rate. Are you seeing significantly different attach rates amongst your enterprise customers than your kind of store customer base?

I mean, the attach rate went up, I believe, from 15% from what we previously disclosed to 17%. That includes our Cecilia product, and we're happy with the growth in the attach rate, but I don't actually know the number offhand, and we don't disclose kind of the mix between enterprise versus non-enterprise. I would say there has been a ton of interest from all of our customers in Cecilia Q&A, both the enterprise large law firms and also smaller firms, and it does attract a ton of interest, and we're really pleased with the number of customers and the growth that we saw, particularly in Q4.

Yes, just to add on to that regarding Cecilia and specifically Cecilia Q&A, what I consistently hear, I've been with over 70 customers in the last nine months since I started, and what I consistently hear from them is where they see the most value to Cecilia Q&A is on our largest matters, and typically it's our largest customers that end up bringing the largest matters into DISCO.

When customers adopt Cecilia Q&A, do you see them adopted one matter at a time, trying to figure it out, you know, test it out first, or do you see kind of full adoption across their matters?

Yes, typically they'll start with one matter, and then from there they will grow to additional matters when they have success.

Thank you for taking my questions.

You bet.

And that concludes our question and answer session. I will now turn the call back over to CEO Eric Friedrichsen for closing remarks.

Thank you, everyone, and good evening. I really appreciate all of you joining us today. I am extremely excited about what we have going on right now at DISCO. We are making very good progress. We are advancing our products. We're strengthening our team. We're delivering results that we really believe set us up for long-term success. I'm encouraged by the early signs that we're seeing in our strategy. It's starting to take hold, and I've got confidence in our plan to execute. Our focus remains on driving innovation, improving execution, and making the most of the opportunities ahead. We're excited about what we've accomplished, and we're even more excited about what's next. I look forward to sharing our progress in the coming quarters. Thank you.

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