Summary
DISCO's fiscal 2023 fourth quarter showed better profitability on a year-over-year basis. Revenue rose 9.9% to $35.7 million. Gross profit increased 10.6% to $27.0 million. Gross margin was 75.7%, up 0.5 percentage points. The operating loss narrowed 61.7% to $7.7 million. Operating margin was negative 21.5%, up 40.1 percentage points. Net loss narrowed 68.8% to $5.8 million. Operating cash flow turned positive at $3.2 million, up 133.9%. Capital expenditures were $1.3 million, up 95.4%. Deferred revenue was $4.3 million, up 4.9%. Remaining performance obligations were $24.3 million, up 13.0%.
For the full fiscal year, revenue rose 2.1% to $138.1 million. Gross profit rose 2.1% to $103.1 million. Gross margin was 74.7%, flat. The operating loss narrowed 30.6% to $49.8 million. Operating margin was negative 36.1%, up 17.0 percentage points. Net loss narrowed 40.4% to $42.2 million. Diluted EPS was negative $0.70, a narrowed loss of 41.7%. Operating cash flow was negative $25.5 million, up 44.5%. Capital expenditures were $4.9 million, up 11.0%. Adjusted EBITDA was negative $25.9 million, compared with negative $44.5 million.
Customer metrics were mixed. DISCO ended 2023 with 1,441 customers, up from 1,327 at the end of 2022. Large customers, defined as those with more than $100,000 of revenue over the previous 12 months, rose to 289 from 265. Large customers accounted for approximately 75% of revenue in 2023, down from 78% in 2022. Dollar-based net retention fell to 92% from 106%. Usage-based revenue represented 89% of total revenue in both years, while subscription revenue represented 11%. The company primarily sells through a direct sales force organized by sales development representatives, field sales, inside sales, and customer success. It also relies on channel partners and integrations to drive adoption. The company released its ediscovery chatbot, Cecilia, in the U.S. in the fourth quarter of 2023. It also acquired a Fastcase license for primary law and intends to launch that offering in 2024.
Management's outlook commentary points to continued investment. Research and development expenses are expected to increase in absolute dollars. Sales and marketing expenses are expected to remain relatively consistent in absolute dollars and stay the largest operating expense. General and administrative expenses are expected to increase in absolute dollars. Management expects Adjusted EBITDA to improve over the long term as the company achieves greater scale and efficiencies in operating expenses. The company intends to continue expanding its sales force headcount in strategic locations across the United States and globally. International expansion remains a priority, with less than 10% of 2023 revenue generated outside the United States and planned headcount growth in India. The company also intends to pursue selective acquisitions and strategic investments.
Risks remain significant. Macroeconomic uncertainty, inflation, rising interest rates, and the Russia-Ukraine and Israel-Hamas wars could pressure customer spending. Businesses may slow information technology spending during downturns. Most revenue is usage-based, and customers generally do not commit to specific usage amounts. Revenue can fluctuate with the timing, duration, and scope of legal matters. The decline in dollar-based net retention to 92% highlights renewal and expansion risk. Competition, pricing, and customer spending levels could also affect growth. The company listed $36.0 million of cloud platform purchase commitments due within two years. Management believes existing cash and cash equivalents will be sufficient to fund anticipated cash requirements for the next 12 months.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q4 FY2023 | Q3 FY2023 | QoQ | Q4 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $35.7M | $34.9M | +2.3% | $32.5M | +9.9% |
| Gross profit | $27.0M | $26.0M | +4.0% | $24.5M | +10.6% |
| Gross margin | 75.7% | 74.4% | +1.3 pp | 75.2% | +0.5 pp |
| Research & development | $10.5M | $12.1M | -12.7% | $16.1M | -34.5% |
| Sales & marketing | $14.3M | $16.7M | -14.3% | $18.2M | -21.3% |
| General & administrative | $9.9M | $128.0K | +7624.2% | $10.2M | -3.5% |
| Total operating expenses | $34.7M | $28.9M | +20.2% | $44.5M | -21.9% |
| Operating income (loss) | -$7.7M | -$2.9M | -165.0% | -$20.0M | +61.7% |
| Operating margin | -21.5% | -8.3% | -13.2 pp | -61.5% | +40.1 pp |
| Net income (loss) | -$5.8M | -$1.0M | -467.0% | -$18.7M | +68.8% |
| Net margin | -16.3% | -3.0% | -13.4 pp | -57.4% | +41.1 pp |
| Diluted EPS | -$0.70 | -$0.02 | -$0.68 | -$0.32 | -$0.38 |
| Customers | 1,441 | — | — | 1,327 | +8.6% |
| Net retention rate | 92.0% | — | — | 106.0% | -14.0 pp |
Risks
The filing states the revenue growth rate has declined from prior periods and may continue to decline. FY2023 revenue was $138.1 million, up 2.1% year to date versus FY2022, and quarterly revenue within individual product offerings has fluctuated.
Dollar-based net retention rate fell to 92% as of December 31, 2023 from 106% as of December 31, 2022, and the company says it could decrease further as the customer base matures.
A substantial portion of revenue comes from top 10% customers, and large customers accounted for approximately 75% of FY2023 revenue. Loss or reduced usage by these customers could disproportionately reduce revenue.
Most revenue is usage-based and tied to the timing of litigation, investigations and other legal matters. DISCO Review usage can materially impact quarter-to-quarter revenue fluctuations even though it is a small proportion of annual revenue.
The market is highly fragmented and competitive, with competitors such as Consilio, Epiq, KLDiscovery, Relativity, Everlaw and Reveal. Some competitors have greater resources and can bundle or discount offerings, creating pricing pressure.
The September 2023 departure of former CEO Kiwi Camara and ensuing negative publicity disrupted the business and may harm the ability to attract, recruit and retain key employees. The company is also reassessing corporate culture.
A purported stockholder class action filed in September 2023 remains pending, and the company may face additional securities litigation. This could result in substantial costs and divert management attention.
The company must keep pace with rapid technological change and AI innovation, including its ediscovery chatbot Cecilia released in Q4 2023 and the Fastcase primary law launch planned for 2024. Delays or failure to innovate could reduce competitiveness.
Inflation, rising interest rates, and the Russia-Ukraine and Israel-Hamas wars have created economic uncertainty. Businesses may slow information technology spending, which could reduce legal spending and harm results.
The platform relies on AWS for cloud infrastructure. Any disruption, capacity limitation, or unfavorable change in AWS terms could interrupt service, increase costs, or require an expensive transition.
The usage-based pricing model has limited operating history, may not gain continued acceptance, and the company may need to change pricing or offer concessions. This could adversely affect revenue and gross margin.
Sales cycles with enterprise customers can be long and unpredictable, requiring significant upfront sales and marketing expense before revenue is recognized. Deployment may also be delayed.
Less than 10% of FY2023 revenue came from outside the United States. Further international expansion faces regulatory, tax, currency, and operational challenges.
Net operating loss carryforwards may be limited or expire unused, and changes in tax laws or challenges to intercompany pricing could increase tax liabilities.
SaaS KPIs
All quarters →Total Customers
Dollar-Based Net Retention Rate
Summary, forecast, risks and KPIs are extracted from CS Disco, Inc.'s SEC filings for Q4 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 2, 2026.