CS Disco(LAW) - 2025 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - In Q4 2025, total revenue grew 11% year-over-year to $41.2 million, while software revenue increased 14% year-over-year to $35.1 million, marking the third consecutive quarter of accelerating growth for both metrics [9][30] - For the full year 2025, total revenue was $156.8 million, up 8% year-over-year, and software revenue was $134 million, up 12% year-over-year [10][30] - Adjusted EBITDA for Q4 was negative $2.2 million, representing an Adjusted EBITDA margin of negative 5%, an improvement from negative 12% in Q4 of the prior year [9][37] - The full year 2025 Adjusted EBITDA was negative $10.2 million, with a margin of negative 7%, compared to negative 13% in 2024 [10][37] Business Line Data and Key Metrics Changes - Services revenue in Q4 was $6 million, down 3% year-over-year, primarily due to a reduction in traditional review services [30] - The decline in services revenue for the full year was $22.8 million, down 8% year-over-year, attributed to the decline in traditional review business [30] Market Data and Key Metrics Changes - The company finished the year with 330 customers generating over $100,000 in total revenue, contributing $119 million, or 76% of total revenue [11] - There was a record high in total terabytes on the platform, with over 30% revenue growth from multi-terabyte matters year-over-year in Q4 [11] Company Strategy and Development Direction - The company aims to disrupt the e-discovery industry by leveraging AI-native technology and enhancing its product offerings, including Cecilia AI and Auto Review [7][12] - A new pricing model was introduced to simplify access to DISCO's tools, combining all capabilities into a single offering to reduce friction for customers [22][23] - The strategy focuses on expanding wallet share with existing customers and increasing adoption of generative AI capabilities [10][75] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in achieving Adjusted EBITDA breakeven by Q4 of 2026, driven by revenue growth and reduced one-time costs [39] - The company anticipates total revenue guidance for Q1 2026 in the range of $39.0 million to $41.5 million, with software revenue guidance of $33.75 million to $35.25 million [38] Other Important Information - The company ended Q4 with $114.6 million in cash equivalents and short-term investments, with no debt [38] - The gross margin for Q4 was 77%, and for the fiscal year 2025, it was 76%, an increase from 75% in fiscal year 2024 [33] Q&A Session Summary Question: Why now for the pricing and packaging changes? - Management indicated that the changes were driven by customer demand and feedback, aiming to reduce friction in selling DISCO's services [41][44] Question: What is the intermediate growth rate outlook? - Management believes the company can achieve 20%+ growth, supported by larger customer engagements and increased adoption of generative AI capabilities [46][48] Question: Are general AI tools impacting the e-discovery process? - Management noted that customers have not reported using general AI for e-discovery, emphasizing the unique requirements of litigation that differ from other legal areas [54][58] Question: What are the potential downsides of the new commercial model? - Management acknowledged that simplifying the pricing model could lead to some initial challenges but emphasized the long-term benefits of improved customer understanding and sales efficiency [67][68] Question: Any changes to the sales organization? - Management confirmed that the sales strategy has been effective, with a focus on outside sales and incentivizing new matters, and they are considering adding talent to capitalize on growth opportunities [70][71]