Summary
CS Disco reported third quarter revenue of $36.27 million, up 3.8% from the prior-year quarter. Gross profit was $26.53 million, up 2.0%. Gross margin slipped to 73.1%, down 1.3 percentage points. Operating margin was negative 30.0%, down 21.7 percentage points. The quarter's operating loss was $10.88 million, and the loss widened from the prior-year quarter. Net loss was $9.16 million, and the loss widened. Diluted EPS was negative $0.15, and the loss per share widened. The company said new customer additions offset lower usage from existing customers, while revenue from software product offerings rose and services revenue fell. DISCO provides cloud-native, AI-powered legal product offerings that simplify legal hold, legal request, ediscovery, legal document review, and case management.
For the first nine months of fiscal 2024, revenue reached $107.84 million, up 5.4% from the prior-year period. Gross profit was $79.96 million, up 5.1%, and gross margin was 74.1%, down 0.2 percentage points. The year-to-date operating loss narrowed to $35.59 million. Net loss narrowed to $30.57 million, and diluted EPS improved to negative $0.51. Operating margin for the nine months was negative 33.0%, up 8.2 percentage points. Operating cash flow was negative $10.84 million, up 62.2%. Capital expenditures were $2.22 million, down 38.0%. Deferred revenue at quarter end was $3.04 million, up 2.6% from a year earlier, and remaining performance obligations were $24.10 million, up 37.7%. The company said the change in revenue from existing customers was driven by decreases in usage of its product offerings by several existing customers.
Adjusted EBITDA was negative $4.5 million in the third quarter, matching the prior-year quarter. For the nine months, Adjusted EBITDA was negative $14.4 million, compared with negative $24.9 million. Management issued fourth quarter guidance for total revenue and Adjusted EBITDA of negative $7.6 million to negative $5.6 million. For the full fiscal year 2024, the company guided total revenue and Adjusted EBITDA to negative $22.0 million to negative $20.0 million. The company also announced new executives: Lauren Caruso as Senior Vice President, Chief Sales Officer, Susan Garcia as General Counsel and Chief Compliance Officer, and Joe Jacobson as Senior Vice President of Operations. DISCO added Cecilia Auto Review to its generative AI ediscovery products in North America and launched its Cecilia AI Platform in the European Union and the United Kingdom, including Cecilia Q&A, Cecilia single doc Q&A, and Cecilia doc summaries. The company said its fourth quarter and fiscal year 2024 outlook is based on assumptions subject to change, many of which are outside its control, and there can be no assurance that DISCO will achieve these results.
The quarter's results came with familiar risks. DISCO has a history of operating losses and a limited operating history. Future growth depends on maintaining innovation and brand, adding new customers, increasing usage and penetration within the existing customer base, expanding sales coverage, extending channel partnerships, expanding the offering portfolio, and expanding internationally. A significant majority of revenue is tied to customer usage, which fluctuates with the timing and activity of legal matters. The company also faces competition, macroeconomic uncertainty, and global events such as the Russia-Ukraine and Israel-Hamas wars. General and administrative expenses increased in the quarter, partly because the prior-year period included a reversal of stock-based compensation related to the cancelled CEO Performance Award. The company also recorded expenses associated with stockholder litigation. The company said it expects research and development expenses to increase in absolute dollars but may fluctuate as a percentage of revenue over time. Sales and marketing expenses are expected to increase in absolute dollars and remain the largest operating expense for the foreseeable future. General and administrative expenses are expected to remain relatively consistent in absolute dollars but may fluctuate as a percentage of total revenue. The company said its existing cash and cash equivalents and short-term investments will be sufficient to fund anticipated cash requirements for the next 12 months. The company said it expects Adjusted EBITDA to improve over the long term as it achieves greater scale and efficiencies in operating expenses.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2024 | Q2 FY2024 | QoQ | Q3 FY2023 | YoY |
|---|---|---|---|---|---|
| Revenue | $36.3M | $36.0M | +0.7% | $34.9M | +3.8% |
| Gross profit | $26.5M | $26.7M | -0.7% | $26.0M | +2.0% |
| Gross margin | 73.1% | 74.2% | -1.1 pp | 74.4% | -1.3 pp |
| Research & development | $12.8M | $12.9M | -1.0% | $12.1M | +5.7% |
| Sales & marketing | $15.0M | $15.5M | -3.3% | $16.7M | -10.3% |
| General & administrative | $9.7M | $10.7M | -9.9% | $128.0K | +7445.3% |
| Total operating expenses | $37.4M | $39.1M | -4.3% | $28.9M | +29.4% |
| Operating income (loss) | -$10.9M | -$12.4M | +12.2% | -$2.9M | -275.5% |
| Operating margin | -30.0% | -34.4% | +4.4 pp | -8.3% | -21.7 pp |
| Net income (loss) | -$9.2M | -$10.8M | +15.5% | -$1.0M | -789.1% |
| Net margin | -25.3% | -30.1% | +4.8 pp | -3.0% | -22.3 pp |
| Diluted EPS | -$0.15 | -$0.18 | +$0.03 | -$0.02 | -$0.13 |
Risks
The legal technology market is highly fragmented and competitive, with competitors including Consilio, Epiq, KLDiscovery, Relativity, Everlaw, and Reveal. Some competitors have greater resources and can bundle competing applications at lower prices, creating pricing pressure.
Substantially all revenue comes from customer usage, and most customers have no long-term contractual commitments, so they can reduce or cease usage at any time. MD&A notes revenue from existing customers decreased $3.1 million in FY2024 Q3 and $5.9 million YTD, driven by lower usage by several existing customers.
A limited number of customers, specifically the top 10%, represent a substantial portion of revenue. Loss or reduced purchasing by these customers could disproportionately impact revenue, and DISCO Review usage can materially affect quarter-to-quarter revenue fluctuations.
Revenue growth has declined from prior periods, and historical growth may not indicate future performance. FY2024 Q3 revenue rose 3.8% and YTD rose 5.4%, while net loss widened to $9.2 million in the quarter from $1.0 million in the prior-year quarter.
The departure of former CEO Kiwi Camara in September 2023 and ensuing negative publicity disrupted the business and may impair ability to attract, recruit, and retain key employees. The company is reassessing aspects of corporate culture and has appointed new executives, including CEO Eric Friedrichsen in April 2024.
Unfavorable economic conditions, including inflation, rising interest rates, and the Russia-Ukraine and Israel-Hamas wars, could cause customers to slow legal technology spending. MD&A states these conditions have led to global economic uncertainty and may harm results if the economy worsens.
A purported stockholder class action filed in September 2023 remains pending, and the company may face additional securities litigation. Legal fees related to stockholder litigation increased professional services costs, and the matter could divert management attention and harm the stock price.
The company uses a usage-based pricing model with limited history, and it may need to change pricing or offer concessions to attract and retain customers. Frequent or significant users may demand substantial price concessions, which could reduce revenue, gross margin, and cash flow.
International expansion, including growing headcount in India, adds complexity and cost, while less than 10% of revenue was generated outside the United States in FY2024 Q3 and YTD. The company also plans to launch primary law offerings in 2025, requiring additional investment.
The platform relies on AWS to host substantially all infrastructure, and any disruption, capacity limitation, or unfavorable change to the AWS arrangement could interrupt service and harm customer relationships. Switching cloud providers would be technically difficult, expensive, and time consuming.
The March 2024 stock repurchase program for up to $20.0 million was fully utilized as of June 30, 2024, reducing cash reserves. Future repurchases could increase stock price volatility and diminish ability to finance growth or acquisitions.
The company collects and remits sales tax in some jurisdictions but faces uncertainty over economic nexus and VAT/GST obligations. A successful tax assertion could result in substantial payments, administrative burdens, and customer friction.
SaaS KPIs
All quarters →Adjusted EBITDA
Non-GAAP gross margin
Non-GAAP operating margin
Summary, forecast, risks and KPIs are extracted from CS Disco, Inc.'s SEC filings for Q3 FY2024 (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.