CS Disco, Inc. (NYSE: LAW) — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This annual filing was signed February 22, 2024; it is not a standalone fourth-quarter report.
Business context
DISCO sells cloud-based, AI-enabled software and related services for legal hold, legal requests, e-discovery, document review and case management. Revenue is predominantly usage-based, so results depend on the timing and volume of customers’ legal matters. At year-end, DISCO reported 1,441 customers (1,327 in 2022), including 289 large customers; dollar-based net retention was 92%, down from 106%.
Financial performance
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Revenue | $138.1 million | $135.2 million | Up 2% |
| Gross profit / margin | $103.1 million / 75% | $101.0 million / 75% | Margin unchanged |
| Operating expenses | $153.0 million | $172.8 million | Down 11% |
| Operating loss | $(49.8) million | $(71.8) million | Loss narrowed |
| Net loss | $(42.2) million | $(70.8) million | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $(25.9) million | $(44.5) million | Loss narrowed |
| Cash and cash equivalents at year-end | $159.6 million | $203.2 million | Down $43.7 million |
FY2023 quarterly revenue was $33.1 million in Q1, $34.3 million in Q2, $34.9 million in Q3 and $35.7 million in Q4. FY2023 software revenue was $112.3 million and services revenue $25.8 million. Usage-based contracts generated 89% of revenue; subscriptions generated 11%.
Cash used in operating activities was $25.5 million, versus $46.0 million in 2022. Investing activities used $20.0 million, including $14.0 million for a Fastcase primary-law license; financing activities provided $1.9 million. The company reported no conventional borrowings in the balance sheet; it had $9.0 million of operating lease liabilities and $0.2 million of finance lease liabilities at year-end. Total disclosed future commitments were $47.5 million, including $36.0 million for cloud platform services.
Changes, outlook and material developments
- Revenue growth was modest, and revenue from existing customers fell $11.0 million, partly offset by $13.9 million from customers added since year-end 2022. Management attributed the existing-customer decline to lower usage by several customers.
- Operating expenses fell across research and development, sales and marketing, and general and administrative functions. Reductions in force in January and May 2023 generated $2.6 million in restructuring charges.
- General and administrative expense benefited from a $7.7 million reversal of previously recognized stock compensation after former CEO Kiwi Camara’s September 2023 departure and cancellation of his performance award. The departure and related negative publicity were identified as potential business and talent-retention risks.
- DISCO released its Cecilia AI platform in the U.S. in Q4 2023 and intends to introduce access to primary law using its Fastcase license in 2024. Management expects research and development expense to increase in absolute dollars in the near term; sales and marketing expense is expected to remain relatively consistent in absolute dollars.
- Management said existing cash and cash equivalents should cover anticipated requirements for the next 12 months. It expects Adjusted EBITDA to improve over the long term, but provided no specific revenue, profit or cash-flow guidance in this filing.
- Key risks include usage volatility and customer concentration, retention below 100%, competition, continued operating losses, dependence on AWS cloud infrastructure, cybersecurity and privacy exposure, regulatory uncertainty around legal services and AI, and macroeconomic pressures.
Contingencies and governance
A September 2023 stockholder securities class action alleging misleading statements about revenue-growth drivers remains pending and seeks unspecified damages. A separate November 2023 action was dismissed without prejudice in January 2024. The company stated it could not reasonably estimate possible losses in excess of amounts accrued. Management reported effective disclosure controls and internal control over financial reporting as of December 31, 2023; the auditor did not attest to internal-control effectiveness.
Investor facts to verify
- Whether declining dollar-based net retention and lower usage among existing customers persist, and how revenue develops after only 2% FY2023 growth.
- Whether the company can reduce cash burn while funding product development and meeting cloud and other commitments; cash declined $43.7 million during 2023.
- Whether Cecilia and the Fastcase primary-law integration gain adoption and contribute revenue, and whether related costs or execution risks are material.
- Developments, potential costs and disclosures concerning the pending securities litigation and any other legal contingencies.
- The effect of the former CEO’s departure, workforce reductions and subsequent equity awards on leadership stability, employee retention and stock-based compensation. The filing reports 3.9 million RSU and PSU grants after year-end through February 22, 2024, with expected compensation expense of $30.5 million.