Summary
DISCO reported third quarter fiscal 2021 revenue of $29.9 million, up 67% from the prior-year quarter. Gross profit was $22.0 million, up 78.5%, and gross margin reached 73.8%, up 4.7 percentage points. The company still posted an operating loss of $9.1 million, wider than the prior-year quarter, and operating margin fell to -30.4%, down 13.3 percentage points. Net loss was $9.2 million, also wider than the prior-year quarter. Diluted EPS was -$0.19, narrower than the prior-year quarter. For the first nine months of fiscal 2021, revenue was $80.5 million, up 63.5%, while net loss was $15.2 million, narrower than the prior-year period.
The quarter's growth came from both existing and new customers. DISCO said 29% of the revenue increase was from additional usage and adoption by existing customers, while 71% came from new customers added during the period. Usage-based revenue represented 89% of total revenue in the quarter, and subscription revenue represented 11%. International customers generated 4% of revenue in the quarter. The company completed a secondary public offering on September 17, 2021, with net proceeds of approximately $310.2 million to the selling stockholders. An early lock-up release will occur on November 15, 2021 for approximately 6.6 million shares. DISCO also highlighted awards, including the Austin Business Journal Best CEO Awards 2021 for CEO Kiwi Camara and a 2021 Tech Cares Award from TrustRadius.
Guidance points to slower growth and wider losses ahead. For the fourth quarter of 2021, DISCO guided revenue to $28.2 million to $28.8 million, representing year-over-year growth between 47% and 50%. The company guided fourth quarter adjusted EBITDA to -$10.0 million to -$9.0 million. For the full fiscal year 2021, DISCO guided revenue to $108.7 million to $109.3 million, representing year-over-year growth between 59% and 60%. Full year adjusted EBITDA guidance is -$21.1 million to -$20.1 million. The company noted that its outlook depends on assumptions that are subject to change and many of which are outside its control.
Cash flow and remaining performance obligations give a mixed picture. Operating cash flow was -$8.6 million in the quarter, down from the prior-year quarter, and -$18.8 million for the first nine months, down from the prior-year period. Capital expenditures were $0.89 million in the quarter, up from the prior-year quarter, and $2.34 million for the first nine months, up from the prior-year period. Deferred revenue was $1.58 million at September 30, 2021. Remaining performance obligations were $17.0 million. Adjusted EBITDA was -$7.6 million in the quarter, compared with -$3.2 million in the prior-year quarter, and -$11.1 million for the first nine months, compared with -$17.9 million in the prior-year period. Non-GAAP gross margin was 74% in the quarter, compared with 69% in the prior-year quarter.
Risks remain substantial. DISCO has a history of operating losses and a limited operating history. The company depends on adding new customers, increasing usage and penetration within its existing customer base, expanding sales coverage, building a digital sales channel, expanding internationally, extending channel partnerships and integrations, broadening its offering portfolio, and pursuing strategic acquisitions and investments. Other risks include compliance with laws and regulations, security or data privacy breaches, competition, general market and economic conditions, and the ongoing COVID-19 pandemic. Revenue can fluctuate because customers generally do not commit to a specific amount of usage, and legal casework timing, duration and scope are unpredictable. The company also faces additional public-company costs and expects certain COVID-19-related expense reductions to reverse in the fourth quarter of 2021 and beyond.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2021 | Q2 FY2021 | QoQ | Q3 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $29.9M | $29.5M | +1.0% | — | — |
| Gross profit | $22.0M | $20.9M | +5.6% | — | — |
| Gross margin | 73.8% | 70.6% | +3.2 pp | — | — |
| Research & development | $9.7M | $7.9M | +22.8% | — | — |
| Sales & marketing | $13.2M | $10.8M | +21.6% | — | — |
| General & administrative | $8.3M | $5.1M | +61.3% | — | — |
| Total operating expenses | $31.1M | $23.8M | +30.5% | — | — |
| Operating income (loss) | -$9.1M | -$3.0M | -205.3% | — | — |
| Operating margin | -30.4% | -10.1% | -20.3 pp | — | — |
| Net income (loss) | -$9.2M | -$3.1M | -199.2% | — | — |
| Net margin | -30.9% | -10.4% | -20.5 pp | — | — |
| Diluted EPS | -$0.19 | -$0.23 | +$0.04 | — | — |
Risks
A limited number of customers represent a substantial portion of revenue, with top 10% customers driving significant revenue. Loss of or reduced purchasing by these customers could disproportionately impact revenue.
Most customers do not have long-term contractual financial commitments and can reduce or cease usage at any time. Usage-based revenue represented 89% of total revenue in the three months ended September 30, 2021, making results sensitive to legal matter timing and customer usage fluctuations.
The market 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. Pricing pressures and larger competitors with greater resources could harm market share.
The solution and most operations rely on AWS. Any disruption, capacity limitation, or material change in the AWS arrangement could interrupt service and harm customer relationships.
A material weakness in internal control over financial reporting was identified related to secondary sales transactions by current and former employees. Remediation is ongoing, and failure to remediate could impair timely and accurate financial reporting.
Sales cycles with enterprise customers can be long and unpredictable due to evaluation processes, procurement, and timing of legal matters. This creates delays between sales expenses and revenue.
Success depends on senior management and key personnel, including Co-Founder and CEO Kiwi Camara, and on software engineers and salespeople. Competition for talent is intense, particularly in Austin, Texas, and remote work has increased competition.
International operations are limited, with 4% and 7% of revenue generated outside the U.S. in the three and nine months ended September 30, 2021. Expansion faces regulatory, operational, and currency challenges.
The company operates in a highly regulated legal industry and is subject to federal, state, local, and foreign laws, including rules governing the practice of law and e-discovery. Noncompliance could force operational changes or harm the business.
The ongoing COVID-19 pandemic and variants could reduce legal spending, delay litigation, and disrupt customer operations. The company experienced flat revenue growth in Q2 2020 due to court closures and delays.
The usage-based pricing model has limited history and may not be optimal. Customers may demand price concessions, and changes to pricing could adversely affect revenue, gross margin, and cash flow.
Revenue growth depends on strategic relationships with law firms and legal services providers. Partners may prioritize competitors or fail to drive adoption of the solution.
Lock-up agreements expire for approximately 6.6 million shares on November 15, 2021, following early lock-up expiration. Sales of these shares could depress the stock price.
There is uncertainty around sales, use, VAT, and GST tax collection in various jurisdictions. Adverse tax determinations could result in substantial payments and administrative burdens.
Directors, officers, and affiliates beneficially owned approximately 34% of outstanding common stock as of September 30, 2021, limiting other stockholders' influence over corporate matters.
SaaS KPIs
All quarters →Adjusted EBITDA
Non-GAAP gross margin
Non-GAAP operating margin
Adjusted EBITDA margin
Summary, forecast, risks and KPIs are extracted from CS Disco, Inc.'s SEC filings for Q3 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.