Summary
CS Disco reported third-quarter revenue of $34.5 million, up 15.5% from the prior-year quarter. Year-to-date revenue reached $102.7 million, up 27.5%. Gross profit was $25.8 million for the quarter, up 17.3%, and gross margin improved to 75.0%, up 1.2 percentage points. The top line grew while the company continued to invest heavily in sales and research. Management said customer count reached 1,318, an increase of 26% year over year. Usage-based revenue represented 89% of total revenue for the quarter, with subscription revenue at 11%. International revenue was 7% of revenue in the quarter and 6% year to date.
Profitability moved in the opposite direction. Operating loss widened to $20.1 million, and operating margin fell to negative 58.2%, down 27.9 percentage points. Net loss widened to $20.1 million, and diluted EPS was negative $0.34. Year-to-date net loss was $52.1 million, and year-to-date diluted EPS was negative $0.89. Adjusted EBITDA was negative $13.1 million for the quarter. The company attributed the larger losses to higher personnel costs and stock-based compensation. It also incurred costs related to opening a new headquarters in Austin, Texas, and to operating as a public company.
Cash generation remained negative. Operating cash flow was negative $14.5 million for the quarter, down 67.9%, and negative $36.7 million year to date, down 95.0%. Capital expenditures were $1.9 million for the quarter, up 109.3%, and $3.7 million year to date, up 59.6%. Deferred revenue was $2.7 million, up 74.0%, while remaining performance obligations were $19.6 million, up 15.3%. The balance sheet shows a growing deferred revenue base, but the company still burns cash. Management said it believes existing cash and cash equivalents will be sufficient to fund anticipated cash requirements for the next 12 months.
Operational metrics showed customer growth. Customer count reached 1,318, up 26% year over year. Management highlighted recognition as a leader in the IDC MarketScape Worldwide eDiscovery Early Case Assessment Software 2022 Vendor Assessment. The company also acquired legal workflow solutions from Congruity360 in February 2022 and opened a new Austin headquarters in June 2022. DISCO's CFO won the public company category in the Austin Business Journal Best CFO Awards 2022. These items point to a company investing in product breadth and brand while trying to scale its sales motion.
For the full fiscal year 2022, management guided revenue to $132.0 million to $136.0 million, representing year-over-year growth between 15% and 19%. Adjusted EBITDA guidance for the full fiscal year is negative $54.0 million to negative $50.0 million. The outlook assumes continued investment in sales and research. Risks include a history of operating losses, limited operating history, dependence on customer usage, timing of legal matters, competition, macroeconomic conditions such as inflation and rising interest rates, and the COVID-19 pandemic. The company also notes that revenue can fluctuate based on the number and nature of legal matters, and that a significant majority of revenue is tied to usage.
The quarter showed solid top-line growth and improving gross margin, but the widening losses and negative operating cash flow remain the central tension. New customers drove the revenue increase, while two existing customers reduced usage. The company's go-to-market strategy focuses on acquiring new customers and driving increased usage among existing customers. Management continues to invest in product development, sales coverage, and international expansion. The guidance implies that the company expects growth to continue, but also that losses will remain substantial through the end of the fiscal year.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2022 | Q2 FY2022 | QoQ | Q3 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $34.5M | $33.7M | +2.3% | $29.9M | +15.5% |
| Gross profit | $25.8M | $25.2M | +2.5% | $22.0M | +17.3% |
| Gross margin | 75.0% | 74.8% | +0.1 pp | 73.8% | +1.2 pp |
| Research & development | $15.7M | $15.2M | +3.4% | $9.7M | +62.6% |
| Sales & marketing | $19.3M | $18.9M | +2.0% | $13.2M | +46.7% |
| General & administrative | $10.9M | $11.1M | -1.4% | $8.3M | +31.9% |
| Total operating expenses | $45.9M | $45.2M | +1.6% | $31.1M | +47.7% |
| Operating income (loss) | -$20.1M | -$20.0M | -0.6% | -$9.1M | -121.4% |
| Operating margin | -58.2% | -59.2% | +1.0 pp | -30.4% | -27.9 pp |
| Net income (loss) | -$20.1M | -$20.2M | +0.6% | -$9.2M | -117.4% |
| Net margin | -58.2% | -59.8% | +1.7 pp | -30.9% | -27.3 pp |
| Diluted EPS | -$0.34 | -$0.35 | +$0.01 | -$0.19 | -$0.15 |
Risks
Net loss was $52.1 million for the nine months ended September 30, 2022, and the loss widened from $15.2 million in the prior-year period. Operating cash flow used $36.7 million in the nine months ended September 30, 2022, an increase of $17.9 million from the prior-year period, and the company had an accumulated deficit of $179.5 million as of September 30, 2022.
Usage-based revenue represented 89% of total revenue in the three and nine months ended September 30, 2022, and most customers do not have long-term contractual commitments and can reduce or cease usage at any time. Revenue growth depends on customers increasing their use of the solution, and the company expects its revenue growth rate may decline in the future.
A limited number of customers represent a substantial portion of revenue, and in the three months ended September 30, 2022, a $1.6 million decrease in revenue from existing customers, principally two customers, offset new customer revenue. The company remains susceptible to purchasing decisions of top customers.
Sales cycles with enterprise customers can be long and unpredictable, and revenue is directly correlated with the timing and activity of litigation, investigations and other legal matters. The company states quarterly results may fluctuate significantly and period-to-period comparisons may not be meaningful.
The market for legal technology solutions is highly fragmented and competitive, with competitors including large legal services providers, legacy on-premise software providers and cloud software providers. Some competitors have greater resources and may offer lower-priced or bundled offerings, creating pricing pressures.
The company relies on highly skilled personnel, including CEO Kiwi Camara, software engineers and salespeople, and the loss of key employees could harm the business. Personnel costs increased significantly in the nine months ended September 30, 2022, including a $17.6 million increase in research and development personnel costs.
Unfavorable global economic conditions, including a recession or reductions in legal spending, could harm the business. Management noted the current inflationary environment and rising interest rates have not materially impacted liquidity to date but continues to evaluate spending.
The company relies on Amazon Web Services to host its cloud-based solution and support most operations. Any disruption, capacity limitation or material change to the AWS arrangement could interrupt service and harm customer relationships.
The company has in the past experienced material weaknesses in internal controls over financial reporting and will be required to comply with Section 404 for fiscal year 2022. It will also lose smaller reporting company scaled disclosure exemptions starting with its first quarterly report in 2023.
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 Q3 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.