CS Disco Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to CS DISC First Quarter of Fiscal Year 20 24 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 like to now hand the conference over to your first speaker today, Head of Investor Relations, Alexey Lakhchikov.

Operator

Please go ahead.

Speaker 1

Good afternoon, and thank you for joining us on today's conference call to discuss the financial results for DISCO's Q1 of fiscal year 2024. With me on today's call are Scott Hill, DISCO's incoming Chair of the Board of Directors Eric Friedreichsen, DISCO's Chief Executive Officer and Michael LaFehr, 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.

Speaker 1

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 polar looking statements. Polar looking statements represent our management's belief 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 ks for the year ended December 31, 2023, filed with the SEC on February 22, 2024, and the company's upcoming quarterly report on Form 10 Q for the quarter ended March 31, 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.

Speaker 1

Reconciliations between GAAP and non GAAP financial measures and 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 Scott.

Speaker 2

Thanks, Alexi. Good afternoon, everyone, and thank you for joining us. I'm very excited that we are joined today by DISCO's new CEO, Erik Friedrichshan. I noted on my very first call nearly 8 months ago that I was committed to be DISCO's CEO until we found an outstanding long term answer. Eric is that person.

Speaker 2

The Board conducted a global search and interviewed a diverse range of candidates to find a CEO to take DISCO to the next level. We took our time to find a person who we believe can enable DISCO's long term success. Eric stood out above everyone else. His experience scaling global software companies, leading complex sales functions, developing best in class products and elevating the customer's voice, combined with a deep commitment to building and leading a collaborative and healthy culture made it clear that he is the right person for the job. Eric is uniquely positioned to lead DISCO into its next stage, which we believe will be characterized by strong company culture, a return to consistent growth and improved profitability and shareholder returns.

Speaker 2

I'm excited at the prospect of working closely with Eric as the Chair of DISCO's Board of Directors to help support him and the DISCO team who have come to mean so much to me. Before we discuss our Q1 performance, I want to give Eric an opportunity to introduce himself. Eric?

Speaker 3

Thank you, Scott, and hello, everyone. I'm very happy to be here. I just want to start by taking a moment to thank you, Scott. Your leadership over the past 8 months has been both stabilizing and inspirational. I am very appreciative.

Speaker 3

In fact, we're all very appreciative of everything that you've done to help lead the team through this difficult period. So thank you, Scott. For the rest of you, as a quick introduction, for the past 4 years, I served as the CEO of Imverse, the world's largest independent provider of travel and expense software. During my time at Imburse, we more than doubled the revenue to over $250,000,000 while improving gross margins, expanding the employee population and becoming a very healthy and profitable business. Prior to Imbursed, I spent over 25 years leading large organizations in general management, sales, services and technology, most notably at Adobe, SAP and Concur.

Speaker 3

And now I am honored to become the CEO of DISCO. I have already met and spent time with our senior leadership as well as many key employees and a handful of loyal and valued customers. The first thing I'd like to say is that the DISCO team should be very proud of everything that they've accomplished. Growing a business to over $130,000,000 in revenue in 2023 with strong gross margins over 1400 customers and industry leading products is not a simple task. But even more so at DISCO, we are at the precipice of a truly revolutionary change.

Speaker 3

Every industry is evolving due to the advent of generative AI. We all know that. But the legal industry is the one that stands to benefit the most from this technological advancement. Whether it's the process of document review, legal research, brief writing or even legal advice, every area of the legal workflow will be impacted by AI. DISCO stands at the vanguard of legal technology because of the vision of our employees and our leaders to invest and develop the technologies to take advantage of this exact moment.

Speaker 3

The foundation at DISCO is strong and with focus and collaboration, we will achieve remarkable things. So as you know, I am just getting started, but I look forward to meeting all of you and our investor base and providing more updates on our strategy and our accomplishments in future earnings calls. Thank you, everyone. And now I'll turn it back over to Scott.

Speaker 2

Thanks, Eric, and welcome aboard. Now let's dive into our solid performance during the Q1 of 2024. Total revenue for the Q1 of 2024 was $35,600,000 up 7% versus the same quarter last year. Software revenue in Q1 grew 9% over the prior year to $29,900,000 Notably, software revenue and revenue growth each accelerated sequentially for the 3rd consecutive quarter. Services revenue was $5,700,000 in the 1st quarter and adjusted EBITDA was negative $5,200,000 an improvement of $7,800,000 year over year.

Speaker 2

We ended the Q1 with around $149,000,000 of cash, no debt and 14.42 customers, up 4% from this time a year ago. As we've mentioned on prior calls, we see opportunity to grow within our existing customer base while also continuing to add new high value customers. Of note, we're also evaluating the cost to acquire and retain some of our smaller customers. I am proud of the way our customer facing teams executed over the last two quarters despite our internal challenges and even as we began the early stages of rebuilding and reorganizing many aspects of our go to market approach. Over the past few months, we have developed a much deeper understanding of our customers.

Speaker 2

That understanding has led to improved customer segmentation, a reassessment of our marketing and SDR investments, and a realization that we need to replenish and refresh our sales and customer success functions. We're confident that these efforts will help us reaccelerate our growth in the medium term, but acknowledge that all of the change is having a slight dampening effect in the 2nd quarter. Importantly, Eric is stepping into the CEO role at an auspicious time given his demonstrated track record of leading high performing go to market functions. His assessment and enhancement of our go to market redesign combined with our loyal customer base and innovative product offerings give us confidence in our ability to reaccelerate revenue growth, which will then enable improved profitability and enhance shareholder returns. During the Q1, our product and engineering teams further enhanced our innovative generative AI offering even as they continue to develop additional features for our core eDiscovery platform.

Speaker 4

As you

Speaker 2

may have seen, we just announced a new Cecilia AI feature called Doc Summaries. This is a generative AI tool that provides detailed and high level takeaways of individual documents at a user's request with the simple click of a single button on the DISCO dashboard. The reality in a review process is that many of the documents lawyers review might be dozens of pages long or in foreign or esoteric language. It slows down the review and can be overwhelming for the person going through the process. Doc summaries was designed to overcome all of those hurdles and provide an immediate, crunchy summary of an individual document, enhancing the speed of a lawyer's workflow and review process.

Speaker 2

We're excited to bring this capability to our customers at no charge to supplement our large scale document summary skill embedded in our Cecilia platform. Next, we're excited about Cecilia Auto Review. I hinted at this feature on the last earnings call and it is now being demoed with a small number of customers. Cecilia Auto Review leverages DISCO's AI to allow lawyers to set parameters that are then used to tag relevant documents in a case database. This is a core element of the legal review process to identify the most relevant documents for a given case.

Speaker 2

The task typically takes several lawyers and hundreds of hours to go through terabytes of data and manually tag thousands of documents. In one example, Cecilia Auto Review assessed 9,000 documents in a live customer database in 2 hours, a task that would have required as much as 200 hours to manually complete. Importantly, the Cecilia results match well over 90% of the results from the actual human review and the customer acknowledged that in the small number of mismatches, it's probable that the Cecilia results were more correct. Imagine the significant improvement to lawyers' efficiency and how much additional time they will have to spend on building a strong case as opposed to reviewing a high volume of irrelevant documents. We're excited about this next Cecilia skill and we'll have more updates on Cecilia auto review in the coming quarters.

Speaker 2

Even as we continue to develop new Cecilia skills, we remain focused on enhancing our core eDiscovery platform. A feature called data type and custom fields was among the many new features we delivered to our customers during this past quarter. With this functionality, users can effectively search and sort custom fields, unlocking the full potential of DISCO's search functionality. With support for key data types like datetime, text list, integer, Boolean and free text, This update empowers users to streamline their data management process for any field, standard or custom, enabling more intuitive and efficient eDiscovery workflows. Although a more technical feature, this has been one of the most requested enhancements from our customers and we have already had a number of those customers request that we enable this capability on all of their matters.

Speaker 2

We believe our continuous platform enhancements and product releases coupled with our deep understanding of legal workflow, UI and architectural efficiency provides our customers with technology solutions that enhance their ability to produce the best legal outcomes for their clients. Our platform is efficient, scalable and fast. In March alone, over 1,200,000,000 pages were produced on the platform. And at the peak, over 51,600,000 pages were produced in a single hour. This highlights the scale of the DISCO offering and the ability to leverage our cloud native platform to handle the largest matters with unparalleled efficiency.

Speaker 2

From my first day in this role, I have consistently stated my strong belief that DISCO has the right people and products to reaccelerate growth and deliver profitability, positive cash flow and enhance shareholder returns. We have analyzed our culture and go to market challenges and are developing action plans to materially improve both areas. The launch of our stock buyback program in March was a reflection of our belief that a stronger culture and better go to market combined with our talented employees, industry leading products and large growing market opportunity support our objective to generate meaningfully more value than is reflected in our current share price. We're confident that Eric's leadership and experience can help VSCO realize that objective. With that, I'll turn it over to Michael.

Speaker 5

Thank you, Scott. In Q1, twenty twenty four, total revenues were 35,600,000 dollars up 7% year over year. Software revenues were $29,900,000 up 9% year over year. Services revenues, which include DISCO Manage Review and Professional Services were $5,700,000 up 2% year over year. As Scott mentioned in his remarks, we are continually adding capabilities to our platform.

Speaker 5

This was an exciting quarter for us as we are starting to see contributions from Cecilia, which Scott previously discussed at length. Since beginning to introduce Cecilia to the market in December 2023, we've been adding new customers at a healthy clip, which has been encouraging. At this point, Cecilia is still an immaterial portion of the business, but we are starting to see signs of traction with our customer base. 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.

Speaker 5

Our gross margin in Q1 was 76%. 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 $14,700,000 or 41% of revenue compared to 53% 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 $10,000,000 or 28 percent of revenue compared to 39 percent of revenue in Q1 of the prior year.

Speaker 5

This decrease was primarily driven by a reduction in research and development personnel and a decrease in per employee costs as a result of globalization efforts. General and administrative expense in Q1 was $8,800,000 or 25 percent of revenue compared to 26 percent of revenue in Q1 of the prior year. General and administrative expenses were relatively flat year over year. Operating loss in Q1 was $6,500,000 representing an operating margin of negative 18% compared to negative 42% in Q1 of the prior year. Adjusted EBITDA was negative $5,200,000 in Q1, representing an adjusted EBITDA margin of negative 15% compared to an adjusted EBITDA margin of negative 39% in Q1 of the prior year.

Speaker 5

Net loss in Q1 was 4,700,000 dollars or negative 13 percent of revenue compared to a net loss of $12,100,000 or negative 37% of revenue in Q1 of the prior year. Net loss per share for Q1 was $0.08 compared to $0.20 per share for Q1 of the prior year. Turning to the balance sheet and cash flow statement. We ended Q1 with $148,700,000 in cash and cash equivalents and no debt. Operating cash flow in Q1 was negative $7,300,000 compared to negative $14,800,000 in Q1 of the prior year.

Speaker 5

Turning to the outlook. For Q2, 2024, we are providing total revenue guidance in the range of $34,500,000 to $36,500,000 and software revenue guidance in the range of $29,000,000 to $30,000,000 We expect adjusted EBITDA be in the range of negative $7,500,000 to negative $5,500,000 While we remain confident in our ability to accelerate our growth over the medium to long term, we did see some softness in the start of the second quarter, as Scott mentioned, which we expect will have an impact on our full year numbers. For fiscal year 2024, we have narrowed our total revenue guidance range to $143,000,000 to $151,000,000 and software revenue guidance to the range of $120,000,000 to $124,000,000 We continue to expect adjusted EBITDA to be in the range of negative 26,000,000 dollars to negative $19,000,000 Now I'd like to turn the call over to the operator to open up the line for Q and A. Operator?

Operator

Thank you. We will now begin the question and answer session. Your first question comes from the line of Scott Berg from Needham. Your line is open.

Speaker 6

Hi, everyone. Thanks for taking my questions here. Eric, I guess welcome to the company. Look forward to connecting in person. But I wanted to hear about what your first priorities are, do you think over maybe the first 90 to maybe 180 days with the company?

Speaker 3

Yes. Thanks, Scott. I really appreciate it. I've got a very detailed laid out plan over the next 90 days, very much focused on coming up to speed as you can imagine, getting to know our people, our customers, our partners, our products, our business. It's going to be intense.

Speaker 3

I'm going to be learning a lot very quickly, but I also want to be moving at a quick enough pace to make sure that we're driving the right focus and that we're taking advantage of the best opportunities that we possibly can. So it's funny because it's only been a week and a half, but I've already been able to join my 1st board meeting, run my 1st company meeting, visit with our teams in both Austin and New York, and also spend time with 5 of our best customers. We're talking big law firms here in the U. S. Along with some Fortune 100 Companies.

Speaker 3

And that was great experience, really understanding the value that they're getting today out of DISCO products, the opportunities they see for us to do more with them and interestingly their desire to embrace AI. So I've got a lot of learning to do. The next several weeks, I'm going to be visiting teams in India and in London and meeting with many more of our customers and partners.

Speaker 6

Great. And then I wanted to follow-up on Scott and Michael's comments on softness in the quarter. Can you maybe double click on that and expand upon, is it more on service side, specifically within e discovery, large customers, small customers, any additional details there would be helpful. Thank you.

Speaker 2

Yes. Scott, thanks. It's Scott. I'll take that question and then Michael can chime in if he wants to add anything to it. So I think what you're seeing in this office in the Q2 is very simply a minor impact from the reorganization we're doing on the sales side.

Speaker 2

As I've talked about for the last couple of calls and particularly on the last call, we have for the first time as a company segmented our customers and started to develop an approach that is unique relative to what those customers look like, how they buy, their size, the type of law they practice. And we've effectively started to align our team in such a way that, for example, our field sales is now 100% focused on the AMLAW 100 and large Corporations and will drive a focus that will be supplemented by SDR investments and marketing investments. Our inside sales team is going to pick up some of the lower end of that group plus the mid market. Our some other parts of our inside sales team will pick up the what I'll call the SMB elements of the market that we're going to approach. And so as we've reassigned people to those different roles, we allowed them through the Q1 to close open opportunities.

Speaker 2

We didn't want to leave money sitting on the table. But now they've turned to what's next in terms of their roles and their focus for that segmentation. For example, in Bigel and on the corporate side, those are relationships that take time to build and the teams are just in the process of doing that. And so a little bit of softness in the quarter related to the reorganization. But the good news from my perspective, it is a very small step back that I think positions us for a really important large step forward.

Speaker 2

Once we've gotten the segmentation work done, our field resources reassigned and reestablished and our marketing and our go to market investments really aligned with that segmentation.

Speaker 6

Excellent. Thanks for taking my questions.

Speaker 2

Thanks, Scott.

Operator

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

Speaker 7

Hi, good afternoon. Thank you for taking the questions.

Speaker 2

I was wondering if you maybe could offer a little bit of insight into given some

Speaker 7

of the changes that you're currently going through both on the executive side as well as some of the changes in go to market initiatives. Thoughts on when you might start to see a meaningful level of acceleration on the top line? And then any kind of benchmarking for your outlook to achieve profitability positive cash flow as

Speaker 1

a result of these changes?

Speaker 2

Yes. So I don't want to put a timeline on it. But what I will say to you is that we demonstrated that we can grow revenues on a sequential basis. We've done that for the last three quarters in software, not only if dollars accelerated, but growth has accelerated. And despite the small backward movement in 2Q dollars, the growth in 2Q software, if you look at the midpoint of our guidance, is 9%, which is consistent with what we did in the Q1.

Speaker 2

I'm confident as we've talked about, however, that the ability and I said it on the last call, the ability for us to get back to 15%, 20%, 25% growth, which I think we're capable of, really depends on us refocusing on the right customers and approaching them in the right way. And that's the investment that we're making. I believe whether that begins to pay off later this quarter, into the Q3 or later this year is harder to say, but there's no doubt in my mind that it will pay off. And I'm not sure we could have a better time for Eric to join. Eric brings a tremendous amount of background from a go to market standpoint.

Speaker 2

He has he more than doubled the revenues at his last company. And so as we've begun the early stages of making the changes in our go to market, Eric joins at a moment where he can help refine those, enhance those and then accelerate them so that not only will the payoff come faster, but I believe it will be a multiple of what it would be without his leadership.

Speaker 3

Yes. And this is Eric. Let me just jump in here too. What I would say is that I've had the opportunity spend quite a bit of time with our senior leadership team that's involved in go to market, Andrea, our SVP of Sales and Tom, our CMO Melanie, our Chief Customer Officer. And I've really been so far very impressed at the work that they're doing to leverage data to understand where we have the most opportunity.

Speaker 3

As Scott has mentioned in the past, 75% of our revenue comes in from our top customers. And then there are some of those outside the 75% that should be our top customers. There's a lot of opportunity there. And I've been doing this for a long time. Every successful organization that I've ever worked with over the last 3 decades plus has started by doing a really good job of understanding their customers, segmenting those customers and then allocating their resources to where they can generate the most value for the customers and the most revenue for the company.

Speaker 3

And I think we're on the right track. I think that we are segmenting in the right way and we're going to make investments in pursuing those customers and expanding within those customers where we can really grow. We're still going to be acquiring net new customers, but we're going to be allocating a good share of our resources to where we think we can get the most revenue, which is in many of our biggest customers.

Speaker 2

And then I do want to pick up on a part of your question I didn't answer because it is important and it's a focus of ours. Fundamentally, the way to sustainable profitability is by reenergizing our top line growth. And we're committed to doing that. I hope you'll notice that even with the slight reduction in the revenue guidance, we held EBITDA and that's because we are making the investments we need to make, but we're also finding ways to optimize as we reevaluate how to apply marketing and SDR and those types of investment in go to market. And so our path to profitability is no different than what I said on the last call.

Speaker 2

This is the year of investment to get us back to growing. That growth as you move into 2025 and 2026 is what will drive us not only to profitability, but to sustainable and improving profitability.

Speaker 7

Got it. Super helpful. And any way you can indicate, is it 75% of your revenue from your top customers? How do you define a top customer? And is there any way you can quantify how that cohort has been growing, maybe unit economics around that cohort?

Speaker 2

Yes. So what Eric was referring to is if you look at our 10 ks and we mentioned this on our last call that we had nearly 300 customers that spent more than $100,000 with us over the full year of 2023. And it's that group of customers that make up 75% of our revenue. Of note, if you go back 2 years, that number has grown by over 30%. That's great news.

Speaker 2

That's a super important metric for us because that means we are growing the wallet share at those nearly 300 customers. We also mentioned on the last call that we had customers who had spent more than $1,000,000 with us that were now in excess of 20. That growth has been a little bit less, but that again is a real opportunity for us because we aren't wallet share constrained. Those nearly 300 customers who spend over 100,000 are the next opportunity to spend over $1,000,000 And so we're very focused in how we deploy our sales resources towards those customers who have the opportunity to grow with us and then to invest more with us. It's one of the reasons why in my prepared remarks, I talk about the technology.

Speaker 2

1,200,000,000 pages, 51,000,000 pages in an hour. Those are gee whiz facts, But what does it mean? What it means is our platform can scale. It can handle the largest matters our customers have. And as we get that message out in front of the customers and build those relationships, those are key metrics we're going to keep in front of you.

Speaker 2

Who's buying more than $100,000 Who's buying more than $1,000,000 That's where the growth is going to come from. Clearly, we're going to cover the entire customer base because there are opportunities inside the 1400 where people could spend $1,000,000 but aren't even at $100,000 yet. But as Eric was mentioning, a key for us is focus. Figure out where the opportunity is, align the investment, align the resource, focus and then go execute.

Speaker 7

Okay, very helpful. Thank you very much.

Operator

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

Speaker 8

Hello. This is Eilon Liani on for Brent Thill. Thank you for taking my question. The first one is to Eric. Nice to meet you.

Speaker 8

My question is, if you could shed some color on what drew you to DISCO and maybe your vision for the company 3 to 5 years out?

Speaker 3

Sure. Very nice to meet you. Thank you. I've been super fortunate. I've worked with some great teams over the years and had some experiences that have put me in a position where I had a few choices, a number of opportunities and I could be a little selective about where I wanted to go next.

Speaker 3

And I really was looking for a company where I felt like there was significant growth, where there was a solid customer base, a strong set of differentiated products, and then a mission that I could get behind and a solid team of people. And so it was sort of a no brainer to be perfectly honest to come to DISCO. I felt like we had really good people, loyal employees at DISCO who even though they've been through some tough times, they're committed to the future and they're passionate about the mission to make law better. We had some we've got products that are state of the art and they're only getting better. We've got new enhancements, new products coming out and an industry leading approach to AI that's differentiated our competitors.

Speaker 3

And I think the other thing I felt about DISCO is that the challenges that we've got are ones that I have overcome time and time again, and I've got an incredible amount of confidence that we can get back to a really significant growth trajectory here at DISCO. So I felt like the company is a really strong company and the challenges that were ahead are ones that I've done before and I look forward to doing at DISCO.

Speaker 8

Super helpful color. And just as a quick follow-up. When I look at the 2024 guide, given the softness embedded in 2Q and the tough comp in 4Q, what are you seeing in the business that gives you confidence in that full year guide? More specifically, if you can show some color around what you're seeing around pipeline activity and large customer usage, that would be super helpful. Thanks.

Speaker 2

Yes. Thanks for the question. So we continue to see not only large customers engaged, but customers across the board. And Eric mentioned some of the reasons why. Even though Cecilia may not be a large revenue contributor for us yet, it is certainly a door opener.

Speaker 2

And so there are a lot of conversations that are initiated based upon, well, this Cecilia thing looks really interesting. It looks like it could be truly transformative. Let's have a conversation. And so the inbound calls that we're taking from customers wanting to hear more about the generative AI offerings are really what encourages me. And again, if you look at it to get to the midpoint of the guide, we've got to accelerate about $1,000,000 a quarter for the next couple of quarters.

Speaker 2

That on average is what we've done for the last 3 quarters. So it's not going to require something that's necessarily outsized. Again, we've got to work our way through this transition of the go to market and the reorganization of the sales team and realignment of investment. That's kind of the risk, but I view that as more of an internal risk versus an external one in the sense of it sets us up for external success whether it's a month from now or 3 months from now. And so my confidence in the rest of the year really is embedded in some of the things Eric talked about.

Speaker 2

The people are focused and committed. We've regained our innovation lead on the product side, which is opening doors to customer conversations, which I believe will lead to revenue growth and an acceleration of revenue in the back half of the year and more importantly into 2025.

Speaker 8

Perfect. Thanks.

Operator

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

Speaker 4

Hi. Thank you for taking my call. Eric, welcome, number 1. And secondly, Scott, a question for you. I appreciate the color earlier on the new deposition summary tool.

Speaker 4

But in general, regarding your new AI products, was wondering if you could just provide some further insights in how you're thinking about monetizing those capabilities. I believe the deposition summary was no charge. How are you thinking about monetizing the other tools you're working on?

Speaker 2

Yes. So thanks for the question. And I appreciate it in particular because I want to give a shout out to our product and engineering team. Our Cecilia document summary capabilities are ones that can handle a mass amount of documents, 100 and thousands of documents that we can summarize for our customers. But what we were running into with competition is, oh, but the competitor is giving me document summary for free.

Speaker 2

And when we asked, well, what do you mean? How could they possibly be doing that? What they meant was they would summarize a document for free. And so we were competing in a world where we had built industrial scale capability and competitors were offering single document summaries, which again, it's useful if I'm a lawyer and I don't want to read 12 pages, I can get a quick summary that's helpful. Our team in the course of 4 weeks from the time we got the feedback that that was an impediment to sales to the time we launched an offering to customers was measured in 4 weeks.

Speaker 2

And I think that demonstrates to you the remarkable capabilities of our technology because we'll still happily sell you what we think is truly the more value add that can summarize many documents. But if what you need is something that can do one document, here it is

Speaker 7

for free. Don't let that be

Speaker 2

a hurdle to doing the deal with us. And so as we think about the Cecilia capabilities, the skills as we refer to them, we think about it in kind of a twofold way. Number 1, we clearly think of it as a way that our existing existing customers can get more value out of their relationship with DISCO by leveraging things like Q and A or embedded in case builder timelines to do their work more efficiently. We also believe that the innovation edge that we have in those products opens the door to new customers who want that efficiency and will then move their cases and their databases on to our platform to be able to leverage it. And so we're still working our way through what the individual pricing versus the package pricing and the overall strategy will be.

Speaker 2

But it's certainly a place where we feel like it's a value pricing strategy and not one that simply chases the lowest dollar.

Speaker 3

Yes. And I'll just jump in on that too. This is Eric. But I think I'm very optimistic about Cecilia AI and all the capabilities and it's not just from seeing demos of the product you're speaking with the DISCO team, but it's from speaking with customers and understanding that they believe that AI is going to revolutionize the industry at this point. And DISCO has got a significant leg up on the competition.

Speaker 3

And it's all about the investment that we've made in AI for the past several years. We're far ahead when it comes to things like security, speed, reliability, capabilities. The early feedback so far on TECILIA Q and A is very positive. We're starting to get some feedback in on deposition summaries and automated review, and that's a pretty incredible opportunity. And some of these capabilities, particularly automated reviews, one that I think about where it's a game changer.

Speaker 3

The amount of time that we can save customers with AI is going to create opportunity for the customer to save money and it's going to create the opportunity for DISCO to generate better margins.

Speaker 4

And then one follow-up here. Michael, I was wondering if you could just address churn in the quarter.

Speaker 5

Hey, Mark. Thanks for the question. So in terms of churn, I mean, we've previously disclosed our dollar based net retention at the end of the year in the K. And we obviously Q1 was a good quarter. We were pleased with the results.

Speaker 5

We would have preferred a bigger beat than we had. We were basically in line with the guidance. And we've discussed a little bit about some of the softness in Q2, but what I will tell you and I agree with everything Scott said, we feel really confident about the second half of the year and a lot of the investments that we've made and are still making are going to pay off and get us back to where we can reaccelerate revenue, which also would lead to improved dollar based net retention numbers back to where they used to be.

Speaker 2

And Marty, just a couple of data points to reinforce that point. Customer count was up year over year and up a little bit modestly from where it was the prior quarter. And DNR also ticked up slightly from where it was at the end of the year. So each of those metrics, as Michael alluded to, suggests that, that along with the revenue performance in the quarter suggests that the churn was modest and not really a factor in the quarter.

Speaker 4

Okay, great. Thank you.

Operator

That concludes our question and answer session. I will now turn the call back over to Incoming Chair of the Board of Directors, Scott Hill for some final closing remarks.

Speaker 2

Thank you very much. Thank you all for joining our call today. When I stepped into the CEO role 8 months ago, my goal was to stabilize the company and work with my DISCO colleagues to acknowledge and more importantly improve what was broken, reinvest in what was working and recreate forward momentum. I want to thank all of my colleagues here at DISCO who have leaned in and focused forward and helped us get the company back on the right track. Your commitment to our customers and our company inspires me.

Speaker 2

A lot of hard work remains to be done, but the opportunity is there for us to take. Now we have to come together and execute. I also want to thank our customers and investors for their patience and their loyalty. We're refocused on serving you and generating positive returns. Eric, welcome to the job.

Speaker 2

Anything you'd like to add?

Speaker 3

Yes, Scott. Actually, first of all, I just want to thank you one more time for everything that you've done for DISCO over these past several months. I'm very fortunate that we get to work together with you as Chair of the Board. So I'm looking forward to that. And like you, I very much appreciate our customers, our partners and our investors.

Speaker 3

I'm looking forward. I'm optimistic about the future of DISCO and I look forward to sharing more at our next quarter's earnings call. So, thank you everybody for joining the call. Have a great evening.

Operator

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

Powered by Quartr
Earnings Conference Call
CS Disco Q1 2024
00:00 / 00:00