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CS Disco, Inc. (LAW)·Q4 2024 Earnings Summary

Executive Summary

  • Q4 2024 revenue rose 4% year over year to $37.0M, with software revenue up 5% to $30.8M; adjusted EBITDA of $(4.3)M beat the prior guide, while GAAP net loss widened to $(25.2)M due to a $15.2M non‑cash impairment on the Primary Law asset and related capitalized development .
  • Large-customer focus gained traction: 315 customers >$100k (+9% y/y) and 19 customers >$1M; software DNR improved to 100% (from 97%), and total revenue DNR to 96% (from 92%) .
  • 2025 outlook introduced: Q1 revenue $35.0–$37.0M and FY revenue $145.5–$157.5M; management targets breakeven adjusted EBITDA by Q4 2026, emphasizing enterprise accounts and Cecilia AI adoption to drive more efficient growth .
  • Potential near‑term stock catalysts: sustained large‑matter wins, continued Cecilia Q&A adoption, and execution on go‑to‑market refocus; watch services (review) softness and pacing against the wide FY25 range .

What Went Well and What Went Wrong

  • What Went Well

    • Enterprise momentum: large customers (> $100k) increased to 315, with usage among this cohort improving and 19 customers >$1M; software DNR rose to 100% and total DNR to 96% .
    • AI traction: customers are adopting Cecilia Q&A for “needle‑in‑the‑haystack” discovery; examples include Orrick cutting review time by >50% and clients expanding to Cecilia Q&A and DISCO Review .
    • Execution vs. guide: Q4 revenue landed at the high end of guidance and adjusted EBITDA outperformed the prior range, aided by lower operating expenses and focus on higher‑value accounts .

  • What Went Wrong

    • GAAP loss widened on non‑cash impairment: Q4 GAAP net loss was $(25.2)M vs. $(5.8)M y/y, primarily from a $15.2M impairment to Primary Law and related capitalized development; management is refocusing on core eDiscovery and Cecilia AI .
    • Services softness: services revenue declined 4% y/y in Q4 (and 7% y/y in Q3 and Q2), with volatility in review activity cited; this remains a headwind to blended growth .
    • Adjusted EBITDA margin flat q/q: non‑GAAP gross margin held at ~75% but adjusted EBITDA margin stayed at (12)%, underscoring the need for scale and sustained large‑matter mix shift to improve profitability .

Financial Results

MetricQ4 2023Q2 2024Q3 2024Q4 2024
Total Revenue ($M)$35.742 $36.005 $36.266 $36.999
GAAP Diluted EPS ($)$(0.10) $(0.18) $(0.15) $(0.42)
Adjusted EBITDA ($M)$(0.957) $(4.736) $(4.503) $(4.287)
Non‑GAAP Gross Margin (%)76% 75% 74% 75%
Adjusted EBITDA Margin (%)(3)% (13)% (12)% (12)%

Segment revenue

Segment Revenue ($M)Q2 2024Q3 2024Q4 2024
Software$29.3 $30.2 $30.8
Services$6.7 $6.1 $6.2

Key KPIs

KPIFY 2023 EndQ3 2024FY 2024 End
Large Customers >$100k (count)289 —315
Customers >$1M (count)——19
Multi‑product Attach Rate (%)15% (prior) —17%
Software DNR (%)97% (prior) —100%
Total Revenue DNR (%)92% (prior) —96%
Cash + ST Investments ($M)—$126.8 $129.1

Notes: Q4 2024 y/y revenue growth was +4% and software +5% per press release . Q4 2024 services revenue declined 4% y/y .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Software Revenue ($M)Q4 2024$30.0–$31.0 Actual $30.8 Met (in‑range)
Total Revenue ($M)Q4 2024$35.2–$37.2 Actual $37.0 At high end
Adjusted EBITDA ($M)Q4 2024$(7.6)–$(5.6) Actual $(4.3) Beat
Software Revenue ($M)Q1 2025—$30.1–$31.1 New
Total Revenue ($M)Q1 2025—$35.0–$37.0 New
Adjusted EBITDA ($M)Q1 2025—$(8.0)–$(6.0) New
Software Revenue ($M)FY 2025—$124–$131 New
Total Revenue ($M)FY 2025—$145.5–$157.5 New
Adjusted EBITDA ($M)FY 2025—$(19)–$(15) New

Earnings Call Themes & Trends

TopicQ2 2024Q3 2024Q4 2024Trend
AI/technology initiativesLaunched Cecilia Auto Review; tested 3,800 docs/hr, precision/recall +10–20 pts; mass redactions; doc summaries .Security and core platform enhancements; account-based marketing; EU/UK Cecilia launch context .Growing Cecilia Q&A adoption; Orrick cites >50% time savings; feature adds like advanced reproductions, document-level Bates .Expanding adoption and feature depth
Go‑to‑market focusShift to enterprise motion and account-based targeting; add seasoned sales leaders .Reorg and refocus; 31 roles eliminated, 22 opened including enterprise sellers .Target accounts, incentives aligned for new usage; large customers driving DNR improvement .Sharpening enterprise focus
Services/reviewServices revenue down 7% y/y; review volatility .Services down 7% y/y .Services down 4% y/y; Q1 guide includes review volatility .Persistent headwind, moderating
Profitability pathFY24 adj. EBITDA expected broadly similar; margin (13)% in Q2 .Adj. EBITDA margin (12)%; opex reallocation .Target breakeven adj. EBITDA in Q4 2026; FY25 adj. EBITDA still negative .Gradual improvement targeted
Product/roadmapMass redactions, doc summaries .Core eDiscovery priority; security/data types .Advanced productions features; shift from Primary Law to core/Cecilia after impairment .Focused on core + Cecilia
Regional expansion—EU/UK Cecilia launch announced (Oct) .International workflow labeling support; broader positioning .Internationalization progressing

Management Commentary

  • “We ended 2024 with 315 customers who each contributed more than $100,000 in total revenue… 19 customers contributing more than $1 million… software DNR improved… to 100% and total revenue DNR… to 96%.”
  • “We believe that no one else offers our unique combination of software and services expertise… to establish DISCO as the go‑to solution for… large matters.”
  • “In Q4, we recorded a full non‑cash impairment charge of $15.2 million on our primary law asset… We are focusing our efforts on core eDiscovery and Cecilia AI capabilities.”
  • “If we execute our planned strategy… we believe we can reach breakeven adjusted EBITDA in Q4 2026.”
  • “We introduced new capabilities… advanced reproductions… and document‑level [Bates] number… important for lawyers… where workflow improvements make a meaningful impact.”

Q&A Highlights

  • AI selling environment: Management sees adoption getting easier, with Cecilia Q&A solving specific eDiscovery use cases and Auto Review designed for defensibility (precision, recall, per‑document explanations) .
  • Profitability target: Management reiterated the plan to reach breakeven adjusted EBITDA by Q4 2026, aiming to get there primarily via revenue growth from larger customers with only modest cost increases .
  • Retention and attach: Software DNR back to 100% (from 97%); total revenue DNR to 96% (from 92%); attach rate improved to 17%; strong interest in Cecilia across customer sizes .
  • Guidance framing: Q1 guide incorporates review volatility; FY25 range reflects timing of strategy shift to larger customers; management confident but notes ramp may take time .
  • Sales motion maturity: Reallocation from account management to new business; hiring enterprise sellers; focus on wallet share expansion within high‑value accounts .

Estimates Context

  • Wall Street consensus (S&P Global) for Q4 2024 and Q1 2025 could not be retrieved at this time due to an S&P Global request limit error; therefore, we cannot provide quantitative beat/miss versus consensus for revenue or EPS in this report. We will update when available.
  • As an alternative anchor, Q4 results landed at the high end of prior company revenue guidance and exceeded adjusted EBITDA guidance (see Guidance Changes table) .

Key Takeaways for Investors

  • Enterprise pivot gaining traction: more large customers, improving DNRs, and examples of share gains suggest better mix and scalability if sustained .
  • AI differentiation resonating: Cecilia Q&A and Auto Review are seeing real‑world adoption with measurable time savings and defensibility features—key for conservative legal buyers .
  • Services (review) remains a swing factor: persistent y/y declines and Q1 guide caution imply continued volatility; monitor mix and utilization .
  • Profitability path is credible but back‑end loaded: breakeven adjusted EBITDA targeted in Q4 2026; FY25 still negative—execution on large‑matter pipeline is critical .
  • Balance sheet support: $129.1M in cash and short‑term investments and no debt provide runway to execute the strategy .
  • 2025 guide sets a wide band: conservative posture on review plus timing of enterprise expansion drive range; quarterly pacing and Cecilia monetization are key checkpoints .
  • Non‑cash impairment cleans up focus: exit from Primary Law clears the deck for core eDiscovery and Cecilia, aligning opex and roadmap with where customers see value .

Additional Detail (for reference)

  • Q4 2024 financial highlights (press release/8‑K): Software revenue $30.8M (+5% y/y), total revenue $37.0M (+4% y/y), GAAP net loss $(25.2)M, adjusted EBITDA $(4.3)M; FY24 software revenue $120.1M (+7% y/y), total revenue $144.8M (+5% y/y), GAAP net loss $(55.8)M, adj. EBITDA $(18.7)M .
  • Q3 2024 snapshot (for trend): total revenue $36.3M (+4% y/y), software $30.2M (+6% y/y), adj. EBITDA $(4.5)M; headcount and sales realignment initiated .
  • Q2 2024 snapshot (for trend): total revenue $36.0M (+5% y/y), software $29.3M (+8% y/y), adj. EBITDA $(4.7)M; introduced mass redactions and Cecilia Doc Summaries .

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