Summary
DISCO reported second quarter fiscal 2022 revenue of $33.7 million, up 14.1% from the prior-year quarter. Gross profit was $25.2 million, up 21.0%. Gross margin reached 74.8%, up 4.2 percentage points. The top line grew, but the bottom line deteriorated. Operating loss widened to $20.0 million, and net loss widened to $20.2 million. Diluted EPS was -$0.35, a wider loss than the prior-year quarter. Operating margin was -59.2%, down 49.2 percentage points. For the first six months of fiscal 2022, revenue was $68.2 million, up 34.5%. Gross profit for the six months was $50.7 million, up 40.1%. Operating loss for the six months was $31.7 million. Net loss for the six months was $32.0 million. Diluted EPS for the six months was -$0.55. Operating margin for the six months was -46.5%, down 35.0 percentage points. Adjusted EBITDA, a non-GAAP measure, was negative $12.4 million for the quarter, compared with negative $1.6 million in the prior-year quarter. The quarter's gross margin expansion came even as operating expenses rose sharply. Research and development, sales and marketing, and general and administrative expenses all increased.
Operational momentum continued. DISCO ended the quarter with 1,255 customers, an increase of 27% year over year. Usage-based revenue represented 89% of total revenue in the quarter, while subscription revenue was 11%. International customers generated 8% of revenue in the quarter and 6% for the six-month period. The company opened its new headquarters in Austin, Texas, and a new office in New York. It launched topic clustering with automatic indexing. Kiwi Camara was named an Entrepreneur Of The Year 2022 Central South Award finalist. DISCO also received a 2022 Top Rated Award from TrustRadius with a trScore of 8.8 out of 10. In February 2022, DISCO acquired legal workflow solutions from Congruity360. DISCO provides a cloud-native, artificial intelligence-powered legal solution that simplifies ediscovery, legal document review and case management for enterprises, law firms, legal services providers and governments.
Cash generation remains a pressure point. Operating cash flow was -$10.8 million for the quarter, down 90.1% from the prior-year quarter. For the first six months, operating cash flow was -$22.2 million, down 118.0%. Capital expenditures were $1.2 million in the quarter, up 43.7%, and $1.9 million for the six months, up 29.1%. Deferred revenue, current portion, was $2.69 million, up 80.7%. Remaining performance obligations were $22.1 million, up 39.0%. These figures suggest growing bookings, but the company continues to spend heavily to support growth. Management believes existing liquidity will be sufficient to fund anticipated cash requirements for the next 12 months.
Guidance points to continued investment. For the third quarter of 2022, DISCO expects revenue of $32.0 million to $34.0 million, representing year-over-year growth between 7% and 14%. It expects Adjusted EBITDA of negative $19.5 million to negative $17.5 million. For the full fiscal year 2022, revenue guidance is $132.0 million to $136.0 million, or growth between 15% and 19%. Full-year Adjusted EBITDA guidance is negative $60.0 million to negative $56.0 million. The outlook assumes many factors outside the company's control. Risks include a history of operating losses, limited operating history, the ability to add new customers, increase usage and penetration with existing customers, expand sales coverage, establish a digital sales channel, expand internationally, extend channel partnerships and integrations, broaden the offering portfolio, and pursue strategic acquisitions. Other risks include compliance with laws and regulations, security or data privacy breaches, competition, general market, political, economic and business conditions, and the impact of global events such as the ongoing COVID-19 pandemic, including variants, and the Russian military operations in Ukraine. Revenue can also fluctuate because customers generally do not commit to a specific amount of usage and their usage depends on the number and nature of legal matters. There can be no assurance that DISCO will achieve these results.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2022 | Q1 FY2022 | QoQ | Q2 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $33.7M | $34.5M | -2.2% | $29.5M | +14.1% |
| Gross profit | $25.2M | $25.5M | -1.1% | $20.9M | +21.0% |
| Gross margin | 74.8% | 74.0% | +0.8 pp | 70.6% | +4.3 pp |
| Research & development | $15.2M | $12.3M | +23.2% | $7.9M | +93.1% |
| Sales & marketing | $18.9M | $16.4M | +15.3% | $10.8M | +74.8% |
| General & administrative | $11.1M | $8.5M | +29.9% | $5.1M | +115.8% |
| Total operating expenses | $45.2M | $37.3M | +21.3% | $23.8M | +89.7% |
| Operating income (loss) | -$20.0M | -$11.8M | -69.7% | -$3.0M | -572.1% |
| Operating margin | -59.2% | -34.1% | -25.1 pp | -10.1% | -49.2 pp |
| Net income (loss) | -$20.2M | -$11.8M | -70.2% | -$3.1M | -554.3% |
| Net margin | -59.8% | -34.4% | -25.5 pp | -10.4% | -49.4 pp |
| Diluted EPS | -$0.35 | -$0.20 | -$0.15 | -$0.23 | -$0.12 |
Risks
The company incurred a net loss of $20.2 million for the quarter ended June 30, 2022 and $32.0 million for the six months ended June 30, 2022, and operating loss widened to $19.96 million from $2.97 million in the prior-year quarter. It had an accumulated deficit of $159.5 million as of June 30, 2022 and expects continued significant costs to support growth.
Revenue grew 14% for the quarter ended June 30, 2022 and 35% for the six months ended June 30, 2022, but the filing states recent rapid growth may not be indicative of future growth and the revenue growth rate may decline as the business matures or competition increases.
A limited number of customers, specifically the top 10% of customers, represent a substantial portion of revenue, and the quarter's revenue increase was partly offset by a $1.3 million decrease from existing customers including a customer with a large matter that concluded in the latter half of 2021.
Usage-based revenue represented 89% of total revenue in the quarter ended June 30, 2022, and most customers do not have long-term contractual financial commitments, so they may reduce or cease usage at any time.
The company relies on Amazon Web Services to host its solution and support most operations, and any disruption, capacity limitation, or failure to renew the AWS agreement on commercially reasonable terms could interrupt service and harm revenue.
The legal technology market is highly fragmented and competitive, with competitors such as Consilio, Epiq, KLDiscovery, Relativity, and Everlaw, and some competitors have greater resources and can offer lower-priced or bundled solutions.
The business depends on highly skilled personnel, including Co-Founder and CEO Kiwi Camara, and competition for software developers, legal professionals, and sales staff is intense, particularly in Austin, Texas and with remote work.
The company's growth depends on continued innovation of its artificial intelligence system for legal documents, and failure to adapt to rapid technological change or new AI-enabled competitors could make its solution less competitive.
Sales cycles with enterprise customers can be long and unpredictable, and the company may incur significant sales and marketing expenses before recognizing revenue, especially as it expands its sales force and targets larger organizations.
The company uses a usage-based pricing model with limited operating history, and it may need to change pricing or offer concessions, which could reduce revenue, gross margin, and cash flow.
International expansion adds complexity and cost, and revenue generated outside the United States was 8% for the quarter ended June 30, 2022 and 6% for the six months ended June 30, 2022.
The company incurred additional public company expenses, including a $2.3 million increase in corporate insurance expense and a $1.4 million increase in professional services for the six months ended June 30, 2022, and expects G&A expenses to increase in absolute dollars.
In February 2022 the company acquired legal workflow solutions from Congruity360 for $5.3 million, and future acquisitions or strategic investments may be difficult to identify and integrate, divert management attention, and dilute stockholder value.
Stock-based compensation expense increased to $5.5 million for the quarter ended June 30, 2022 from $1.0 million in the prior-year quarter, and the May 2022 CEO Performance Award is tied solely to stock price milestones, which may continue to pressure operating results.
The COVID-19 pandemic and variants may continue to disrupt court systems, litigation proceedings, and customer legal spending, and the company cannot reasonably estimate the impact on future results.
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 Q2 FY2022 (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.