Summary
CS Disco reported second quarter revenue of $34.3 million, up 1.7% from $33.7 million in the prior-year quarter. New customers added since June 30, 2022 contributed $5.2 million, but that gain was mostly offset by a $4.7 million decline from customers that existed as of June 30, 2022. Gross profit was $25.2 million, essentially flat with the prior-year quarter. Gross margin slipped to 73.6% from 74.8%. The company posted a GAAP operating loss of $17.0 million, narrower than the $20.0 million loss a year earlier. Operating margin improved to negative 49.6% from negative 59.2%. Net loss narrowed to $14.9 million from $20.2 million. Diluted loss per share improved to $0.25 from $0.35.
For the first six months of fiscal 2023, revenue was $67.4 million, down 1.1% from $68.2 million in the prior-year period. Gross profit was $50.1 million, down 1.2%. Year-to-date gross margin was 74.3%, flat with 74.4%. The year-to-date operating loss widened to $39.3 million from $31.7 million. Operating margin for the six months was negative 58.3%, down from negative 46.5%. Net loss widened to $35.3 million from $32.0 million. Diluted loss per share was $0.59, compared with $0.55. Operating cash flow used in the quarter was $7.1 million, an improvement from $10.8 million used in the prior-year quarter. Year-to-date operating cash flow used was $21.8 million, compared with $22.2 million. Capital expenditures were $1.7 million in the quarter, up 33.6% from $1.2 million. Year-to-date capital expenditures were $2.5 million, up 33.7% from $1.9 million.
Deferred revenue was $3.3 million at June 30, 2023, up 23.0% from $2.7 million a year earlier. Remaining performance obligations fell 15.8% to $18.6 million from $22.1 million. Customer count reached 1,431 as of June 30, 2023, a 14% increase from the second quarter of 2022. The company announced Cecilia, an integrated AI chatbot for large-scale ediscovery, will be available for private access. It also released Dynamic Threading, In-App Translations, and Cloud Connector for Office 365. Adjusted EBITDA was negative $7.4 million, compared with negative $12.4 million in the prior-year quarter. Management said Adjusted EBITDA improved by approximately 40% quarter over quarter.
Management issued third quarter 2023 guidance for revenue and Adjusted EBITDA, and full fiscal year 2023 guidance for revenue and Adjusted EBITDA. The outlook assumes no major change in macroeconomic conditions. Risks include the company's history of operating losses, its limited operating history, and its dependence on customer usage that fluctuates with the timing and activity of legal matters. A decline in large matters could hurt results. Other risks include competition, the ability to add new customers, expand sales coverage, and manage international expansion. Macroeconomic pressures such as inflation, rising interest rates, and global events like the COVID-19 pandemic and the Russia-Ukraine war could also weigh on spending.
The quarter included a May 2023 reduction in force, and management expects research and development and sales and marketing expenses to decrease in absolute dollars in the near term. Subscription revenue represented 11% of total revenue in the quarter, while usage-based revenue was 89%. Customers outside the United States generated 8% of revenue. The company's revenue remains heavily tied to usage, so large legal matters can cause swings. DISCO also expanded its global footprint to Canada and India.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $34.3M | $33.1M | +3.5% | $33.7M | +1.7% |
| Gross profit | $25.2M | $24.9M | +1.5% | $25.2M | +0.1% |
| Gross margin | 73.6% | 75.0% | -1.4 pp | 74.8% | -1.2 pp |
| Research & development | $13.3M | $15.8M | -15.9% | $15.2M | -12.7% |
| Sales & marketing | $18.1M | $19.1M | -5.3% | $18.9M | -4.6% |
| General & administrative | $10.9M | $12.3M | -11.2% | $11.1M | -1.3% |
| Total operating expenses | $42.2M | $47.1M | -10.4% | $45.2M | -6.5% |
| Operating income (loss) | -$17.0M | -$22.3M | +23.7% | -$20.0M | +14.9% |
| Operating margin | -49.6% | -67.3% | +17.7 pp | -59.2% | +9.6 pp |
| Net income (loss) | -$14.9M | -$20.4M | +26.8% | -$20.2M | +26.1% |
| Net margin | -43.5% | -61.5% | +18.0 pp | -59.8% | +16.3 pp |
| Diluted EPS | -$0.25 | -$0.34 | +$0.09 | -$0.35 | +$0.10 |
Risks
A limited number of top 10% customers represent a substantial portion of revenue, and because usage-based revenue depends on litigation timing, purchasing decisions by these customers can disproportionately impact results. The filing states revenue could fluctuate materially and has in the past been materially impacted by these customers.
Most customers do not have long-term contractual financial commitments and can cancel or reduce usage at any time. For the quarter, revenue increased 1.7% versus the prior-year quarter, but the filing attributes the change to new customers offset by decreases in usage from existing customers; year-to-date revenue decreased 1.1%.
The market for legal technology is highly fragmented and competitive, with competitors including Consilio, Epiq, KLDiscovery, Deloitte, EY, KPMG, PwC, Nuix, OpenText, Relativity, Everlaw, Logikcull and Reveal. Some competitors have greater resources and can bundle competing applications at lower prices, creating pricing pressures.
The solution is hosted on AWS, and the company does not control AWS facilities. Disruption, capacity limits, cyber-attacks, or failure to renew AWS agreements on commercially reasonable terms could cause service interruptions, higher costs, and operational delays in switching providers.
Usage of DISCO Review, the AI-powered document review offering, decreases and increases more significantly with the completion and inception of litigation than other offerings. This can materially impact quarter-to-quarter revenue fluctuations even though it currently is a small proportion of annual revenues.
Unfavorable global economic conditions, including inflation, rising interest rates, bank failures, COVID-19 and the Russia-Ukraine war, could cause reductions in legal spending and slow customer IT spending. MD&A states these conditions have led to economic uncertainty globally and may not be fully reflected until future periods.
The company incurred restructuring charges related to January and May 2023 reductions in force and expects research and development, sales and marketing, and general and administrative expenses to decrease in absolute dollars in the near term. If revenue growth does not offset cost reductions or if restructuring disrupts operations, results could be harmed.
Sales cycles with enterprise customers can be long and unpredictable, and revenue recognition timing is difficult to predict because usage depends on the timing of legal matters. The company may spend significant time and money on sales efforts without assurance of a completed sale.
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, and the loss of key employees could harm the business.
The company plans further geographic expansion, including expanding headcount in India, and states that international expansion adds increased complexity and cost. International operations also subject the company to additional tax and regulatory risks.
The company uses a usage-based pricing model with limited history and has changed pricing in the past. It may need to reduce prices or develop new pricing models, and frequent users may demand substantial price concessions, which could adversely affect revenue, gross margin, and cash flow.
The filing states the annual rate of revenue growth declined from 2021 to 2022 and that substantial historical growth may not be indicative of future growth. If revenue growth does not meet expectations, the company may not achieve or maintain profitability.
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 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 1, 2026.