Summary
CS Disco reported first quarter fiscal 2023 revenue of $33.1 million, down 3.9% from the prior-year quarter. Gross profit was $24.85 million, down 2.5%, and gross margin improved to 75.0% from 74.0%. The top line decline came as revenue from new customers added since March 31, 2022 was offset by lower revenue from customers that existed as of March 31, 2022. Management tied the existing-customer decline to lower usage, primarily within managed review. Usage-based revenue represented 88% of total revenue, down from 90%, while subscription revenue rose to 12% from 10%. The revenue mix shift matters because subscription contracts provide more visibility than usage-based work.
Profitability weakened sharply. GAAP operating loss was $22.28 million, and operating margin fell to negative 67.3% from negative 34.1%. Net loss widened to $20.365 million, or $0.34 per diluted share. The prior-year quarter had an $11.76 million operating loss and an $11.85 million net loss, with diluted loss per share of $0.20. Adjusted EBITDA, a non-GAAP measure, was negative $13.0 million, compared with negative $7.8 million. Adjusted EBITDA margin was negative 39%. The difference between GAAP and non-GAAP results reflects stock-based compensation, restructuring charges, and other adjustments. The January 2023 reduction in force added restructuring costs across the expense base, but those charges are excluded from Adjusted EBITDA.
Operating cash flow was negative $14.75 million, and capital expenditures were $0.84 million, up 33.8%. Deferred revenue was $4.17 million, up 37.4% from the prior-year quarter. Remaining performance obligations were $19.80 million, down 10.4%. The deferred revenue increase suggests some customers are committing to subscription arrangements, while the RPO decline points to lower contracted backlog. Management says existing liquidity will fund anticipated cash requirements for the next 12 months. Still, negative operating cash flow and a widening loss show the company is burning cash. That pressure makes the path to profitability more important as the company invests in new products and markets.
Customer and product updates. DISCO grew to 1,388 customers as of March 31, 2023. The company announced Cecilia, an AI chatbot for large-scale ediscovery, and released Timelines in Case Builder. It opened an office in Gurugram, India, to expand services and provide 24/7 support. International revenue was 8% of total revenue. These moves aim to widen the product portfolio and global coverage. They also add cost and execution risk. The company says a significant majority of revenue depends on customer usage, which fluctuates with the timing and activity of large legal matters. That makes quarterly results sensitive to a few matters, and the managed review softness shows how quickly usage can change.
Guidance and risks. For the second quarter of 2023, DISCO guided revenue of $31.0 million to $33.0 million and adjusted EBITDA of negative $12.0 million to negative $10.0 million. For the full fiscal year 2023, the company guided revenue of $135.0 million to $145.0 million and adjusted EBITDA of negative $40.0 million to negative $36.0 million. The outlook assumes no major improvement in the current demand environment. Management lists a history of operating losses, limited operating history, dependence on usage, competition, international expansion, and macroeconomic conditions such as inflation, rising interest rates, and bank failures as risks. The company believes existing cash and cash equivalents will fund anticipated cash requirements for the next 12 months. Still, the widening losses and negative operating cash flow leave little room for execution errors while the product and geographic expansion plays out.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2023 | Q4 FY2022 | QoQ | Q1 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $33.1M | $32.5M | +1.8% | $34.5M | -3.9% |
| Gross profit | $24.9M | $24.5M | +1.6% | $25.5M | -2.5% |
| Gross margin | 75.0% | 75.2% | -0.2 pp | 74.0% | +1.0 pp |
| Research & development | $15.8M | $16.1M | -1.8% | $12.3M | +28.0% |
| Sales & marketing | $19.1M | $18.2M | +4.9% | $16.4M | +16.1% |
| General & administrative | $12.3M | $10.2M | +20.0% | $8.5M | +44.4% |
| Total operating expenses | $47.1M | $44.5M | +5.9% | $37.3M | +26.5% |
| Operating income (loss) | -$22.3M | -$20.0M | -11.3% | -$11.8M | -89.5% |
| Operating margin | -67.3% | -61.5% | -5.7 pp | -34.1% | -33.1 pp |
| Net income (loss) | -$20.4M | -$18.7M | -9.0% | -$11.8M | -71.9% |
| Net margin | -61.5% | -57.4% | -4.0 pp | -34.4% | -27.1 pp |
| Diluted EPS | -$0.34 | -$0.32 | -$0.02 | -$0.20 | -$0.14 |
Risks
Unfavorable global economic conditions, including inflation, rising interest rates, bank failures, the COVID-19 pandemic and the Russia-Ukraine war, could cause reductions in legal spending and slow customer spending on information technology. MD&A states these conditions have led to economic uncertainty globally and may harm results if the economy worsens.
Revenue decreased 3.9% to $33.13 million in FY2023 Q1 versus the prior-year quarter, and RPO decreased 10.4% to $19.80 million. MD&A attributes the decline to a $6.7 million decrease from existing customers, primarily lower usage within managed review, while usage-based revenue represented 88% of total revenue and is tied to unpredictable litigation timing.
Net loss widened 71.9% to $20.36 million in FY2023 Q1 versus the prior-year quarter, and operating loss widened 89.5% to $22.28 million. The company had an accumulated deficit of $218.6 million as of March 31, 2023, and Adjusted EBITDA was $(13.0) million versus $(7.8) million in the prior-year quarter.
A limited number of customers, specifically top 10% customers, represent a substantial portion of revenue. Revenue could fluctuate materially and has been disproportionately impacted by purchasing decisions of these customers, and the company may remain susceptible to customer concentration if it does not diversify.
The market for legal technology is highly fragmented and competitive, with competitors including Consilio, Epiq, KLDiscovery, Deloitte, EY, KPMG, PwC, Nuix, OpenText, Relativity, RELX, Thomson Reuters, Everlaw, Logikcull and Reveal. Some competitors offer lower prices or bundle competing applications, creating pricing pressure and risk that DISCO Review and other AI offerings may not compete effectively.
The company relies on AWS to host its solution and support most operations, and does not control AWS facilities. Any disruption, capacity limitation, or failure to renew on commercially reasonable terms could cause service interruptions, higher costs, and customer loss, and switching providers would be technically difficult, expensive and time consuming.
Success depends on senior management and key personnel, including Co-Founder and CEO Kiwi Camara, and on software engineers and salespeople. Competition for such personnel is intense, many competitors have greater resources, and equity proceeds may reduce motivation to remain.
Sales cycles with enterprise customers can be long and unpredictable, involving prolonged evaluations, procurement processes and contract negotiations. This can delay revenue recognition and require significant upfront sales and marketing expense without assurance of a completed sale.
The company uses a usage-based pricing model with limited history, and may need to change pricing in the future. Customers may negotiate lower rates or discounts, and pricing decisions may negatively impact revenue mix, gross margin and cash flow.
The company incurred $1.0 million in restructuring charges in FY2023 Q1 related to a January 2023 reduction in force, with charges across research and development, sales and marketing, and general and administrative. MD&A expects research and development and sales and marketing expenses to decrease in absolute dollars, creating execution risk around cost management and growth.
The company plans further geographic expansion, including expanding global employee headcount to India, while less than 10% of revenue was generated outside the United States in FY2023 Q1. International expansion adds operational, legal, tax and compliance complexity and may require substantial time and resources.
The company may need additional capital, and weakness or volatility in capital markets, including disruptions in access to bank deposits or lending commitments due to bank closures, could limit access to capital and increase borrowing costs. If adequate funds are unavailable, it may be unable to invest in growth, and equity issuances would dilute stockholders.
SaaS KPIs
All quarters →Adjusted EBITDA
Non-GAAP gross margin
Non-GAAP operating margin
Adjusted EBITDA margin
Total Customers
Summary, forecast, risks and KPIs are extracted from CS Disco, Inc.'s SEC filings for Q1 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 2, 2026.