Summary
DISCO reported $29.5 million of revenue for its fiscal 2021 second quarter, up 88% from the prior-year quarter. Gross profit rose 85.9% to $20.9 million. Gross margin was 70.6%, down 0.8 percentage points from 71.3%. The operating loss narrowed 44.1% to $3.0 million. Net loss narrowed 43.7% to $3.1 million. Diluted EPS was negative $0.23, compared with negative $0.42. For the six months ended June 30, 2021, revenue rose 61.4% to $50.7 million, gross profit rose 65.9% to $36.2 million, and net loss narrowed 64.0% to $6.0 million. The six-month operating loss narrowed 64.7% to $5.8 million. Diluted EPS for the six months was negative $0.45, compared with negative $1.28. Operating margin improved to negative 10.0% from negative 33.8% in the quarter, and to negative 11.5% from negative 52.5% year to date.
Revenue growth came from both existing and new customers. About 27% of the quarterly increase came from additional usage and adoption by existing customers, and 73% came from new customers added during the period. For the six months, 32% of the increase came from existing customers and 68% from new customers. Usage-based revenue represented 89% of total revenue in the quarter, up from 86% a year earlier, while subscription revenue was 11%, down from 14%. For the six months, usage-based revenue was 88% of total, compared with 87%, and subscription revenue was 12%, compared with 13%. International customers generated 12% of revenue in the quarter and 9% for the six months. Deferred revenue was $1.49 million at June 30, 2021, and remaining performance obligations were $15.90 million.
Operating expenses grew as DISCO invested in headcount and public company readiness. Research and development, sales and marketing, and general and administrative expenses all increased in the quarter and six-month periods. Cost of revenue also rose, driven by outsourced staffing, cloud hosting, and salary and benefits costs. The company reported an operating cash flow deficit of $10.2 million for the six months, compared with a deficit of $15.1 million in the prior-year period. Capital expenditures were $1.4 million year to date, compared with $1.0 million in the prior-year period. Adjusted EBITDA was negative $1.6 million for the quarter, compared with negative $4.4 million a year earlier, and negative $3.5 million for the six months, compared with negative $14.7 million. The company completed its IPO after quarter-end. It sold 7,500,000 shares, including 500,000 shares from the underwriters' option, for net proceeds of approximately $223.2 million after underwriting discounts and commissions of $16.8 million. Since inception, DISCO has raised $401.1 million of capital, including $240.0 million from the IPO and $161.1 million from preferred stock sales. The company has a $40.0 million revolving credit facility that matures on November 30, 2023, with no outstanding debt as of June 30, 2021 and December 31, 2020.
Management expects certain COVID-19-impacted expenses to resume in the second half of 2021. Research and development, sales and marketing, and general and administrative expenses are each expected to increase in absolute dollars, though all three are expected to decline as a percentage of revenue over time. Sales and marketing is expected to remain the largest operating expense. Adjusted EBITDA is expected to fluctuate in the near term and improve over the long term as the business scales. The main risks include the ongoing COVID-19 pandemic and variants, court closures and litigation delays, unpredictable legal casework, customer legal spending cuts or pricing discounts, customer losses, competition, the need to recruit and retain sales personnel, international expansion complexity, acquisition integration, public company costs, and credit facility covenants. Revenue can fluctuate because customers generally do not commit to a specific amount of usage, and the timing, duration, and scope of legal matters are inherently unpredictable.
Forecast
No forward guidance in this quarter's filings.
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2021 | Q1 FY2021 | QoQ | Q2 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $29.5M | — | — | — | — |
| Gross profit | $20.9M | — | — | — | — |
| Gross margin | 70.6% | — | — | — | — |
| Research & development | $7.9M | — | — | — | — |
| Sales & marketing | $10.8M | — | — | — | — |
| General & administrative | $5.1M | — | — | — | — |
| Total operating expenses | $23.8M | — | — | — | — |
| Operating income (loss) | -$3.0M | — | — | — | — |
| Operating margin | -10.1% | — | — | — | — |
| Net income (loss) | -$3.1M | — | — | — | — |
| Net margin | -10.4% | — | — | — | — |
| Diluted EPS | -$0.23 | — | — | — | — |
Risks
A material weakness was identified in internal control over financial reporting related to secondary sales transactions by current and former employees; remediation is ongoing, and failure to remediate could impair timely and accurate financial reporting.
A limited number of customers represent a substantial portion of revenue, with top 10% customers driving significant revenue; loss or reduced purchasing by these customers could disproportionately reduce revenue.
Usage-based revenue represented 89% of total revenue in Q2 2021 and 88% for the six months ended June 30, 2021; most customers do not have long-term contractual financial commitments and can reduce or cease usage at any time, causing revenue to fluctuate.
The solution is hosted on Amazon Web Services, and any disruption, capacity limitation, or failure to renew the AWS agreement on commercially reasonable terms could cause service interruptions and customer loss.
The market is highly fragmented and competitive, with competitors including Consilio, Epiq, KLDiscovery, Relativity, Everlaw, Logikcull, and large professional services firms; pricing pressure and bundled offerings could harm market share.
Recent rapid growth may not be indicative of future growth; revenue increased 87.9% in Q2 2021 and 61.4% for the six months ended June 30, 2021, but the growth rate may decline due to maturation, competition, or failure to take advantage of growth opportunities.
Sales cycles with enterprise customers can be long and unpredictable, requiring significant upfront sales and marketing expense before revenue is recognized, and delays could harm growth.
Success depends on senior management and key personnel, including Co-Founder and CEO Kiwi Camara, and competition for software developers and legal professionals is intense, especially in Austin and with increased remote work.
International expansion adds operational complexity; revenue outside the United States was 12% and 9% for Q2 and the six months ended June 30, 2021, and the solution may need substantial updates for non-US legal systems.
COVID-19 caused flat revenue growth in Q2 2020 and a workforce reduction; future variants or outbreaks could delay litigation, reduce legal spending, or disrupt collections.
The usage-based pricing model has limited operating history and may not be optimal; customers may demand price concessions, and pricing changes could adversely affect revenue and gross margin.
Unfavorable conditions in the legal industry or global economy, or reductions in legal spending, could reduce demand for the solution; this risk is heightened by ongoing COVID-19 uncertainty.
Directors, officers, and their affiliates beneficially owned approximately 37% of outstanding common stock after the IPO, limiting other stockholders' influence and potentially causing strategic decisions not aligned with their interests.
SaaS KPIs
All quarters →Adjusted EBITDA
Summary, forecast, risks and KPIs are extracted from CS Disco, Inc.'s SEC filings for Q2 FY2021 (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 1, 2026.