CS Disco, Inc. (LAW)·Q3 2025 Earnings Summary

Executive Summary

• Q3 delivered accelerating growth with total revenue of $40.9M (+13% Y/Y) and software revenue of $35.2M (+17% Y/Y); non-GAAP gross margin expanded to 77% and adjusted EBITDA improved to $(0.3)M, beating the high end of guidance .
• Results exceeded S&P Global consensus: revenue $40.9M vs $38.5M est.* and EPS $(0.01) vs $(0.07) est., while management also noted $1.3M of contingent revenue recognized this quarter (non-recurring) .
• FY25 guidance was raised/narrowed: total revenue to $154.4–$156.4M (from $148.0–$158.0M), software to $132.6–$133.6M (from $128.0–$134.0M), and adj. EBITDA loss improved to $(11.5)–$(9.5)M (from $(17.0)–$(13.0)M) .
• Strategic catalysts: continued traction in multi-terabyte matters, Cecilia AI adoption up >300% since Sep-30-2024, first UK auto-review project, and new Mourant partnership; these reinforce the AI-led product narrative into Q4 and 2026 profitability target .

What Went Well and What Went Wrong

What Went Well

• Large-matter strategy gained momentum: software revenue +17% Y/Y; multi-terabyte matter growth and stronger enterprise execution under new territory account orchestration .
  • CEO: “meaningful acceleration in both software and total revenue… growing adoption of our advanced GenAI tools” .
• AI adoption and product differentiation: Cecilia databases using AI up >300% since 9/30/24; auto-review execution at scale, with emphasis on trust (citations within results) and workflow integration .
• Profitability progress: non-GAAP gross margin expanded to 77% (from 74% Y/Y) and adjusted EBITDA improved to $(0.3)M vs $(4.5)M Y/Y; company exceeded the high end of guidance for software, total revenue, and adj. EBITDA .

What Went Wrong

• GAAP loss widened Y/Y: net loss was $(13.7)M vs $(9.2)M Y/Y, driven largely by higher G&A and litigation-related expenses; GAAP operating margin was (35)% vs (30)% Y/Y .
• Services still mixed: services revenue was $5.7M; management has repeatedly cited softness in traditional review offset by growing auto-review, indicating a transitionary mix shift .
• Cash burn persists: operating cash flow was $(15.7)M) for the first nine months vs $(10.8)M) prior year; contingent revenue recognition ($1.3M) in Q3 also underscores some non-recurring contribution to the quarter .

Financial Results

P&L and Profitability (GAAP and non-GAAP)

Year-over-Year Growth Indicators

Segment Breakdown

KPIs and Balance Sheet Highlights

Notes: Q3 included $1.3M of contingent revenue recognized at case resolution ($1.2M software; $0.1M services), which management called out as non-recurring .

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• CEO framing: “meaningful acceleration in both software and total revenue… growing adoption of our advanced GenAI tools” and “as we look to exit 2025 in a strong position for future growth” .
• Product/AI differentiation: CPTO highlighted Cecilia’s design for trust (document-grounded answers with citations), breadth of GenAI skills (Q&A, summaries, timelines), and auto-review’s explainability and court-aligned quality metrics .
• Strategy/tone: Focus on large clients/matters, improved execution via territory orchestration and strategic account management; raised FY guide “every quarter” in 2025; confident but disciplined investment posture .

Q&A Highlights

• Contingent case contribution: One large contingent-fee matter closed favorably, enabling $1.3M revenue recognition in Q3 ($1.2M software, $0.1M services); only a “small number” of such arrangements exist and none close to this size .
• Profitability timing: Reaffirmed adjusted EBITDA breakeven target in Q4 2026; could be sooner but prioritizing smart investments to accelerate growth while progressing on efficiency .

Estimates Context

Values with asterisks were retrieved from S&P Global.

Where estimates may adjust: Given the raised FY25 guidance and improving non-GAAP profitability, we’d expect upward revisions to FY revenue and narrowed loss expectations; note the non-recurring $1.3M contingent revenue in Q3 when modeling Q4 run-rate .

Key Takeaways for Investors

• Accelerating top-line with AI-led differentiation: Q3 revenue and EPS beat consensus, with software +17% Y/Y and non-GAAP GM at 77%, signaling leverage despite ongoing GAAP loss .
• Durable demand signals: Multi-terabyte matter strength, expanding >$100K customer cohort (326; 76% of revenue), and external survey showing 72% of legal teams planning GenAI adoption within 12 months support sustained growth .
• FY25 guide raised/narrowed; path to 2026 breakeven intact: Improved FY adj. EBITDA loss range and reiterated Q4’26 adj. EBITDA breakeven target .
• Quality of beat: $1.3M contingent revenue aided Q3, but management says even excluding it, software (+13% Y/Y) and total revenue (+9% Y/Y) exceeded high-end guidance—supporting the underlying momentum .
• Product moat in trust and scale: Cecilia’s document-grounded answers with citations and auto-review explainability align to defensibility standards—key differentiators versus legacy platforms .
• Watch services mix and cash burn: Traditional review remains soft amid auto-review transition; operating cash flow negative YTD, though cash and short-term investments are ample at $113.5M and no debt .
• Near-term: Focus on Q4 execution against guide and continued large-matter wins/AI adoption; medium-term: monitor FY26 profitability trajectory and potential upside from expanding AI penetration and enterprise accounts .

Additional Q3 Press Releases (context)

• AI adoption study: 72% expect to incorporate GenAI in next 12 months; security/privacy top barrier—validating DISCO’s emphasis on trust and defensibility .
• Mourant partnership: Expanded strategic eDiscovery/AI collaboration underscores enterprise traction and credibility in complex, regulated environments .