Business context and reporting period
CS Disco, Inc. (NYSE: LAW) provides cloud-based, AI-powered e-discovery, legal document review and case-management software. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2022, compared with the same 2021 periods. Revenue is predominantly usage-based, making results sensitive to the timing and scope of customers’ legal matters.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $33.7m | $29.5m | $68.2m | $50.7m |
| Gross profit / margin | $25.2m / 75% | $20.9m / 71% | $50.7m / 74% | $36.2m / 71% |
| Operating loss | $(20.0)m | $(3.0)m | $(31.7)m | $(5.8)m |
| Net loss | $(20.2)m | $(3.1)m | $(32.0)m | $(6.0)m |
| Net loss per share, basic and diluted | $(0.35) | $(0.23) | $(0.55) | $(0.45) |
| Adjusted EBITDA, non-GAAP | $(12.4)m | $(1.6)m | $(20.2)m | $(3.5)m |
At June 30, 2022, cash and cash equivalents were $228.2m, down from $255.5m at December 31, 2021. Six-month operating cash outflow was $22.2m; investing outflow was $7.2m, including $5.3m paid for the Congruity acquisition; financing inflow was $2.1m. The company reported no outstanding debt. Lease liabilities totaled $11.2m, including $1.2m current. Stockholders’ equity was $247.8m and accumulated deficit was $159.5m.
Usage-based arrangements generated 89% of revenue in Q2 and the first half. Remaining performance obligations were $22.1m at June 30; the company expected to recognize about $12.5m over the following 12 months.
Material changes versus the prior comparable periods
- Revenue grew 14% in Q2 and 35% in the first half. Q2 growth reflected $5.4m from customers added since June 2021, partly offset by a $1.3m decline from existing customers. Management attributed that decline in part to a large legal matter that concluded in 2021. For the first half, management attributed roughly half of the revenue increase to new customers and half to increased usage by existing customers.
- Q2 gross margin rose to 75% from 71%; first-half margin rose to 74% from 71%. Q2 cost of revenue declined 2%, while first-half cost increased 21% as outsourced staffing and cloud-hosting costs rose.
- Operating expenses increased substantially: Q2 research and development rose 93%, sales and marketing 75%, and general and administrative 116%. Management cited headcount and compensation, including stock-based compensation, growth investments, public-company costs, and resumed travel and marketing activity.
- Stock-based compensation was $8.7m in the first half versus $1.5m a year earlier. The company also recorded $0.8m of unoccupied-lease expense related to its new Austin headquarters.
- In February 2022, DISCO acquired Congruity legal workflow solutions for approximately $6.1m cash, including an $0.8m holdback, plus up to $2.0m contingent consideration. The estimated fair value of contingent consideration was $0.6m at June 30.
Outlook, commentary and risks
Management said existing cash and cash equivalents should fund anticipated cash requirements for at least the next 12 months. It expects Adjusted EBITDA to fluctuate in the near term as it invests in the business, with improvement over the long term as the business scales. The filing provides no specific revenue or earnings guidance.
Management expects research and development, sales and marketing, and general and administrative expenses to rise in absolute dollars as the company grows. It also said future capital needs depend on revenue growth, customer usage, billing patterns and investment levels; additional financing may be needed and may not be available on acceptable terms.
Key risks include volatile usage tied to legal matters; customer reductions in usage or customer concentration; competition and pricing pressure; reliance on AWS and other third-party services; cybersecurity, privacy and regulatory risks; and the ability to manage growth and reach profitability. COVID-19 and related variants could affect customers, legal activity and operations; Russia’s actions in Ukraine had not materially affected operations to date, but future effects were uncertain. Management reported no litigation expected to have a material adverse effect and stated that disclosure controls were effective as of June 30, 2022.
Important facts for investors to verify
- Whether new-customer additions and existing-customer usage can sustain revenue growth, given the predominantly usage-based model and the Q2 decline in revenue from existing customers.
- Whether operating-cost growth, particularly compensation and stock-based compensation, can moderate relative to revenue growth and support a path toward profitability.
- Cash consumption and liquidity: first-half operating cash outflow was $22.2m, and management’s stated expectation is that cash will cover at least 12 months of anticipated requirements.
- Congruity acquisition outcomes, including integration and any changes in the contingent consideration valuation.
- Lease obligations and the financial impact of the new Austin headquarters and New York office leases.