Ladies and gentlemen, thank you for standing by, and welcome to CS Disco, Inc.'s First Quarter of Fiscal Year 2025 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. 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 first quarter of fiscal year 2025. 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, future performance, future capital expenditures, market opportunity, market position, product and go-to-market strategies, 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 with the SEC from time to time, including the section titled "Risk Factors" in the company's annual report on Form 10-K for the year ended December 31, 2024, filed with the SEC on February 20, 2025, and the company's upcoming quarterly report on Form 10-Q for the quarter ended March 31, 2025. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures are an 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 equivalent are 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 our first quarter of fiscal 2025 results, and I'm encouraged by the progress and the traction that we're seeing across the business. Software revenue in Q1 was $30.9 million, and total revenue in Q1 was $36.7 million, towards the high end of the guidance range. Adjusted EBITDA for Q1 was negative $5.1 million or negative 14%, approximately $1 million above the high end of our guidance range. We finished the quarter with $118.8 million of cash and short-term investments and no debt. We ended Q1 with 318 customers who each contributed more than $100,000 in total revenue over the last twelve months, up 8% year over year. We continue to see year-over-year growth in the number of customers spending more than $100,000 with us, as well as the total revenue generated from these customers. In all, these customers represent 76% of our revenue. We saw yet another quarter of growth in the revenue from large multi-terabyte matters. We believe this is a meaningful signal for us for a few reasons. First, it's an indicator for future revenue, as large matters typically remain on the platform for longer. Second, matters tend to expand over subsequent months, which supports further revenue expansion. And third, it reflects the go-to-market changes that we have made that are driving the right interactions with the right customers, resulting in more strategic matters, higher average data per matter, and increased overall usage of our platform. While it's too soon to call this a trend, we are encouraged by these signals and optimistic that momentum will build in the quarters ahead. We continue to focus on the things we can control, including how we engage customers, and we are seeing early signs that our more focused strategic approach is starting…

Thank you, Eric. In Q1 2025, total revenues were $36.7 million, up 3% year over year. Software revenues were $30.9 million, up 3% year over year. Services revenues, which include Disco managed review and professional services, were $5.8 million, up 2% year over year. 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 Q1 was 75%. 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 Q1 was $13.2 million, or 36% of revenue, compared to 41% of revenue in Q1 of the prior year. The year-over-year decline is predominantly due to headcount changes. Research and development expense for Q1 was $12.2 million or 33% of revenue, compared to 28% of revenue in Q1 of the prior year. This increase was primarily driven by an increase in research and development personnel. General and administrative expense in Q1 was $8.4 million, 23% of revenue, compared to 25% of revenue in Q1 of the prior year. General and administrative expenses were relatively flat year over year. Operating loss in Q1 was $6.2 million representing an operating margin of negative 17% compared to negative 18% in Q1 of the prior year. Adjusted EBITDA was negative $5.1 million in Q1, representing an adjusted EBITDA margin of negative 14% compared to an adjusted EBITDA margin of negative 15% in Q1 of the prior year. Net loss in Q1 was $4.9 million or negative 14% of revenue, compared to a net loss of $4.7…

Thank you. We will now begin the question and answer session. Your first question comes from the line of David Hynes from Canaccord Genuity. Your line is open.

Hey. Thank you, guys. So, Eric, it's been a little over a year since you took the reins as CEO at Disco. I can appreciate the first twelve to eighteen months are about getting internal ops where you want them. Obviously, a lot of time has been spent on better aligning the go-to-market motion towards those higher value accounts. What is the plan for the next twelve to eighteen months? What are you focused on to drive fast growth in the business?

Yeah. Thanks, David. It's been a year. I just celebrated my one-year anniversary last week, and I gotta tell you, it's just flown by. When I came to Disco, I had a thesis that there was a tremendous opportunity for us to accelerate our growth and to get to sustainable profitability. It started based on the fact that I knew we had a great set of products, a set of raving fan customers, and a really passionate and talented employee base. But I also was clear that there were some problems that we needed to tackle. And these were problems that I felt like I could really help with because I've tackled them in the past. That was enhancing our culture, improving our operational effectiveness, and revamping our go-to-market. And so you know, we've made incredible strides so far. We've got the best employee engagement scores in the history of the company. We initiated really fundamental changes to how we measure and operate the business. And we rolled out critical changes to our go-to-market. As you mentioned, aligning the majority of our resources to our best accounts, getting them to focus on increasing our wallet share within those accounts, building out our customer success teams, realigning the roles for our salespeople and our customer success people, and changing the comp plan for our salespeople to really incentivize them to sell so that we could have a much more deliberate approach to helping our customers with those strategic and larger matters. We started to see the green shoots from that as we mentioned some of them in our prepared remarks. But the reality is we're just getting started. Most of the things that I mentioned that we have implemented either we implemented a couple of quarters ago, or many of them we implemented in January of this year. Right now, it's about executing our strategy. I'm confident we've got incredible opportunity because we've got the right strategy. We're all aligned on that strategy. We've got fantastic people, great products, and we've got people who could see the future and they want to be part of it. Right now, it's about execution. We need to stay on point. We have hard work ahead of us. We need to stay on point. We need to stay focused, and we have to execute at a high level on the strategy that we've already initiated. So I'm more excited about year two than year one, but year one's been great.

Good. Okay. And then I wanna ask about the new tagline. Right? I mean, sometimes these things are marketing collateral, but the "with you in every case," right, and the promotion of full Disco capabilities. It was unclear to me, like, is that a nod towards wrapping more services around the software? Or what exactly are you trying to accomplish with that kind of positioning of the business?

Yeah. You know, I think you probably know I've met with oh gosh, it's almost close to a hundred customers now face to face over the last year. And it's remarkable how consistent I heard from them that they love our products. And when they would start digging in with them with the types of matters that they use our products for, in some of the cases, they use our products for all of their matters. But in other cases, they really think of Disco as a self-service solution. We're so easy to use. We're so fast. Attorneys can get in and use the system themselves. But for some of their larger, more strategic matters, the attorneys aren't gonna get in the system every single day. They're gonna lean on their either their internal eDiscovery teams or they're gonna lean on services to help them, whether it's ingesting their data or managing the project throughout. A strength of ours is the fact that we're so easy to use. We're fast. We can be self-service. But sometimes they want more than that. And we've got great services. We always have or we at least have for the last few years. But we haven't always promoted them. We need to make sure our customers know that we're with them every case. If they have a matter that is self-service, they want to use this self-service, that's fine. If they've got a large matter where they want our help, we can absolutely help them with that. In many of those cases, they're going to leverage our services to help them, let's say, ingest the data or manage the case. But an attorney could wake up in the middle of the night and have a theory about a case they want to test. And they can go directly into Disco themselves. In natural language, use Disco, use Cecilia Q&A to ask a natural language question to test the theory behind their case. Really, what we're trying to get through with the customer value proposition of "with you in every case" is that we've got the best of both worlds. We've got an integrated solution with services and product together that can help them in any case no matter how complex it is.

Yep. Yep. Makes sense. Well, thank you for the color. Nice to see full-year estimates moving higher off of Q1. I don't think we've seen that in a couple of years. So, good luck.

Thank you. Yeah. Appreciate it, Dave. Thank you.

Your next question comes from the line of Mark Schappel from Loop Capital Markets. Your line is open.

Hi. Thank you for taking my question. Eric, question for you. I appreciate your commentary on what you're seeing in the broader macro environment. And in your prepared remarks, you mentioned that Disco is well prepared to weather an economic downturn. Could you just provide some additional details on maybe some of the expense levers that you could employ or bring to bear to reduce operating losses if we do dip into an economic slowdown?

Sure. I'll get started, and Mike, you can feel free to jump in here as well. First thing I would say regarding the potential economic downturn here, historically, litigation has done pretty well in economic downturns. In fact, there could be some headwinds, but oftentimes there are also tailwinds that help increase the amount of litigation. There's potential this could create some additional opportunity for us. While we don't think we have too much risk there, we obviously are always looking at our business and making sure that we're doing everything we can to mitigate against that risk. Fortunately, the strategy that we have to work with our clients on their most critical matters, the ones that also happen to be larger, we can tailor to ensure that we're working on the matters that are less potentially impacted by a negative economy. So from a revenue standpoint, we continue to make sure that we're focused on our strategy around going after the most strategic, largest matters in the correct practice areas. From a cost perspective, the way to think about it is, and I've said last quarter that we intend to be adjusted EBITDA breakeven in Q4 of 2026, and that still continues to be the case. We're making investments right now to ensure that we're taking advantage of the opportunity ahead of us. This is a big market. It's a growing market. I think Disco over time has the opportunity to be a 20% plus grower. But there are certain things that we need to do in this business that are fundamental. I mentioned some of them already. We needed to create a sales enablement program. We had no sales enablement people. We needed to create a new customer success team because we had a very small customer success team so that we could free up our salespeople to actually go sell and grow the business. We have a quote to cash project that we have to complete to help grease the skids and make us much more efficient. We've rolled out a very targeted account-based marketing approach. Some of these things require investment, and that's the investment that we're making right now. If we thought it was appropriate for us to reduce costs or to be able to generate more EBITDA sooner, it's possible we could do that. I just wanna make sure that we do that in a way that's responsible and make sure that we're not missing out on the real opportunity ahead of us, which is to accelerate our growth and not just get to profitability, but to get to sustainable profitability.

Great. And then as a follow-up, with respect to your rebuilt go-to-market engine, I was wondering if you could just comment a little bit on how new customers generally come to Disco. Is it through in-person meetings or events? Or is digital marketing playing a bigger role?

New customer acquisition comes in a variety of different ways. Right now, the vast majority of our marketing has shifted to more of an account-based marketing approach. It's a combination of events. There is some digital aspect to it. There's a lot of thought leadership associated with it. There are certainly regional activities that we do that tend to be around thought leadership. There are certain events that we go to like Legal Week in New York in March. Many of our team were at CLOCK this week, which is the legal operations conference. Then there are digital things that we do as well. We have a sales development team as well. But as you know, the vast majority of our focus right now is not on just acquiring new customers. It's on expanding the relationship with our existing customers. We've got many customers that spend $100,000 plus with us or even $1 million plus with us. In some cases, we only have 10 to 15% of their wallet share. By doubling down on those customers to make sure we're working on their larger and more strategic matters, it gives us the opportunity to grow that wallet share pretty significantly. We're still acquiring customers. We're making sure that we acquire customers that fit within our ideal customer profile. We're putting energy there. We've put a lot of resources towards expanding our opportunity within our existing customer base.

Great. Thank you.

And again, if you would like to ask a question, please press. And there are no further questions at this time. I will now turn the call back over to CEO Eric Friedrichsen for closing remarks.

Thank you, and thanks, everyone, for joining us today. The Disco team is making really good progress, and I am excited about where we're trending. I'm excited that we're able to increase our full-year guidance this quarter. I'm incredibly proud of my amazing Disco teammates. I'm optimistic that the initiatives that we're undertaking right now will be a long-term driver for our performance. Being a more customer-focused organization, improving sales execution, and driving product innovation will be key to driving shareholder value. We're excited about what we've accomplished and even more excited about what's next. We're just getting started. I'm looking forward to sharing more progress with you in the coming quarters. Thank you.

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