Ladies and gentlemen, thank you for standing by, and welcome to CS Disco's Third Quarter of Fiscal Year 2025 Conference Call. [Operator Instructions] I would now like to turn the call over to your first speaker today, Head of Investor Relations, Aleksey Lakchakov. Alexey, 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 2025. With me on today's call are Eric Friedrichsen, DISCO's Chief Executive Officer; Michael Lafair, DISCO's Chief Financial Officer; and Richard Crum, DISCO's Chief Product, Technology and Strategy 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 strategy 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 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 September 30, 2025. 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. Reconciliation 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 delighted to be here with you all today to report on another quarter of accelerated revenue growth and operational execution for DISCO. Software revenue in Q3 was $35.2 million, up 17% year-over-year, while total revenue in Q3 was $40.9 million, up 13% year-over-year. Adjusted EBITDA for Q3 was negative $297,000, representing an adjusted EBITDA margin of negative 1%, which is a $4.2 million improvement over Q3 of 2024. Our results include $1.3 million of revenue related to a matter that was contingent on a successful outcome of the case. Michael will speak more to this later. But even without this bump, I am pleased to share that we exceeded the high end of our guidance range for software revenue, total revenue and adjusted EBITDA. We finished the quarter with $113.5 million of cash and short-term investments and no debt. We ended Q3 with 326 customers who each contributed more than $100,000 in total revenue over the last 12 months. The proportion of revenue attributable to these customers is 76%. We're extremely excited about our performance this quarter. The growth acceleration coupled with our improved operational execution is a testament to our larger strategy. Last quarter, I discussed our focus of the growth of large multi-terabyte matters, and we've seen continued positive trends this quarter in that area. The usage patterns in our business have continued to give me optimism. This quarter, we saw continued growth in revenue from both large and small matters with acceleration in revenue from multi-terabyte matters. We are also very pleased with the continued adoption that we are seeing related to our suite of generative AI capabilities, including Cecilia AI and our AI-driven Auto Review. The number of customers utilizing Cecilia AI over the quarter more than tripled year-over-year, and we…

Thanks, Eric. I appreciate the opportunity to share more about how and why our technology is a strategic advantage in this really exciting time. I joined DISCO 16 months ago, knowing of our reputation for having a strong product and for leveraging modern cloud technology and AI to offer a solution that is intuitive, innovative and operating at scale with impressive performance metrics. I also joined looking forward to teaming up again with Eric, whom I worked with as Chief Product Officer at Emburse. Here at DISCO, I have the privilege of leading our product and engineering teams, and I've seen close up how effective we are at offering solutions that meet the high bar our customers have for the technology they use to achieve the best outcomes on the legal matters they manage. Let me give you some examples of why that is true. It shouldn't surprise you that I want to start to tell you about the AI capabilities that make our products so effective with customers. Before I talk about the GenAI features that understandably get more airtime, I think it is important to note that DISCO has been building AI throughout our products for over a decade in ways that directly impact how our customers manage legal matters. Our dynamic topic clustering technology is often the first place a user of DISCO will go after ingesting all of the likely relevant documents. The analytical capability of the models that powers this set of features gives attorneys a quick glance into the people, entities, information and topics resident in the document population. The technology automatically updates the information as new data and documents are added to the platform. Attorneys use this tool set to help understand and analyze thousands or millions of documents in real time. And…

Thank you, Richard. In Q3 2025, total revenues were $40.9 million, up 13% year-over-year, and software revenues were $35.2 million, up 17% year-over-year. Included in these balances is the revenue contributed from a case that has been on our platform for several years and was contingent on the successful outcome of the case. In Q3, we were able to recognize $1.3 million of total revenues from this case, of which $1.2 million related to software. I would like to note that the Q3 total revenue and software revenue year-over-year growth would have been 9% and 13%, respectively, without this contingent revenue, which still exceeds the high end of our guidance range for both metrics. Excluding the large one-time case we recognized in Q3, 2 primary drivers of the software year-over-year revenue performance were growth in the revenue across large and small matters, especially with multi-terabyte matters as well as growth of Cecilia AI adoption. Services revenues, which include DISCO managed review and professional services, were $5.7 million. 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 77% compared to 74% in the prior year. 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 $13.6 million or 33% of revenue compared to 38% of revenue in Q3 of the prior year. On a dollar basis, sales and marketing expense decreased $0.2 million, predominantly driven by lower marketing and consulting expenses. Research and development expense…

[Operator Instructions] And it appears there are no questions. So I will now turn the call back over to CEO, Eric Friedrichsen, for closing remarks. Eric? Actually, Eric, we did just receive one question, if you would like to take it.

Sure.

Okay. Our first question comes from the line of DJ Hynes with Canaccord.

I guess I just wanted to ask about the contingent liability or the contingent case rather. How many cases are like that? Is that industry standard or it's still a little odd?

DJ, let me touch on that real quick. We have a small number of other contingent cases in the system, but nothing close to this size. Let me explain by what we mean by a contingent case. It's basically on a limited basis, we'll enter into a contract where basically the payment is contingent on the conclusion of the legal matter. And in these instances, we don't recognize the revenue until the legal matter is resolved. In Q3, one of our customers under one of these arrangements experienced a favorable conclusion, allowing us to recognize $1.3 million in revenue, of which $1.2 million was software and the balance was services.

Yes. And so that's why we called it out specifically, DJ. We had 17% software growth and 13% overall growth. But even without that case, we had 13% software growth and 9% overall growth in the business, which exceeds the high end of our range even without that contingent case, but we did want to make sure to call out that contingent case specifically.

Okay, great. And then just a quick one for Michael. So we have your previous guidance or I guess your target for in-quarter EBITDA breakeven for Q4 of 2026. But I'm looking at -- we're seeing some linear improvement over the past couple of quarters where you were just under breakeven this quarter. Are you still maintaining that target for next year or do you think there's some upside we could see there?

I'll take that one. This is Eric. Yes, we're still targeting adjusted EBITDA breakeven for Q4 of 2026. We could certainly push to get to profitability sooner. But right now, we're making really smart investments in the business that are obviously paying off in the results in terms of the go-to-market investments that we make, in terms of the innovation investments that we make and those transformational investments. So look, this is a big market. It's a growing market, and the money that we're spending right now is really helping accelerate the revenue of the business. So the target is still Q4 of 2026 for adjusted EBITDA breakeven.

[Operator Instructions] All right. Do not see any callers. So again, I will hand the call back to CEO, Eric Friedrichsen, for closing remarks. Eric, take it away.

Great. Thank you very much. Thanks, everyone, for joining the call today. Look, I am really pleased that our progress in Q3 and really, frankly, our progress throughout the entire year. We've been very fortunate. We set a strategy for this year to focus on our biggest and best customers with the most opportunity for growth and also the matter types where we could add the most value to our customers and also generate the most revenue for DISCO. So we set that strategy, but more importantly, I'm really proud of the team for how they've executed upon that strategy. And it's given us the opportunity in each of the quarters this year to be able to beat our guidance -- this last quarter to be able to beat the high end of our guidance range and for us to be able to increase our guide for the full year every single quarter. But it's not even so much the results that I'm happy about. It's the team and how they've executed upon our strategy. And that gives me a lot of confidence. It gives me a lot of confidence about our future. So I just want to thank our teams. I want to thank our customers for everything they're doing to stay focused on accelerating the growth for DISCO. And I'm looking forward to updating you next quarter. Have a great evening.

Thanks, Eric. And this concludes today's conference call. You may now disconnect. Have a great day, everyone.