CS Disco, Inc. (NYSE: LAW) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024, compared with the three months ended March 31, 2023. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted.
Business context
CS Disco provides cloud-based, AI-powered legal software and services for legal hold, legal requests, ediscovery, document review and case management. Revenue is predominantly usage-based: usage contracts represented 89% of revenue in Q1 2024, while subscription contracts represented 11%. Results can therefore fluctuate with the timing and activity of customers’ legal matters.
Financial results and liquidity
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $35.6 | $33.1 |
| Gross profit / gross margin | $26.7 / 75% | $24.9 / 75% |
| Operating expenses | $39.1 | $47.1 |
| Operating loss / margin | $(12.3) / (35)% | $(22.3) / (67)% |
| Net loss / diluted loss per share | $(10.6) / $(0.17) | $(20.4) / $(0.34) |
| Adjusted EBITDA, non-GAAP | $(5.2) | $(13.0) |
| Cash used in operating activities | $(7.3) | $(14.8) |
- Revenue increased 7% year over year. Software revenue rose 9% to $29.9 million; services revenue increased 2% to $5.7 million. U.S. revenue was $32.4 million and revenue from other countries was $3.2 million.
- Gross margin remained 75%. Adjusted EBITDA margin improved to approximately (15)% from approximately (39)%.
- Cash and cash equivalents were $148.7 million at March 31, down $10.9 million from December 31, 2023. Current assets were $178.6 million and current liabilities $17.0 million, implying working capital of approximately $161.6 million.
- Net cash used in investing activities was $0.7 million, mainly for property, equipment and capitalized software. Financing activities used $2.9 million, including $2.7 million of share repurchases. No conventional borrowings are reported; balance-sheet finance lease liabilities totaled $0.2 million. Operating lease liabilities totaled $8.7 million.
- Stock-based compensation was $5.7 million in Q1 2024, versus $7.2 million in Q1 2023. The company reported an accumulated deficit of $251.2 million.
Material changes versus Q1 2023
- New customers added since March 31, 2023 contributed $5.7 million of revenue, partly offset by a $3.3 million decline from customers already in the customer base at that date, primarily due to lower usage by several existing customers.
- Operating expenses fell 17% overall. Research and development decreased 23%, sales and marketing 17%, and general and administrative 9%. Management attributed much of the reduction to lower personnel costs, reduced headcount and operations shifting to lower-cost international locations; Q1 2023 also included $1.0 million of restructuring charges, with none recorded in Q1 2024.
- Operating cash use improved by $7.4 million, mainly reflecting the lower net loss and improved collections, partly offset by working-capital movements and payment timing.
Outlook, risks and unusual items
- Management said existing cash and cash equivalents should fund anticipated cash requirements for at least the next 12 months. It expects Adjusted EBITDA to improve over the long term as the business scales and operating efficiencies increase. The 10-Q does not provide specific forward revenue or earnings guidance.
- Management expects research and development and general and administrative expenses to increase in absolute dollars in the near term; sales and marketing expense is expected to remain relatively consistent and remain the largest operating expense. These are expectations, not financial guidance.
- Key business risks include unpredictable customer usage tied to legal-matter activity, customer concentration, competition, dependence on AWS and other third parties, macroeconomic uncertainty, cybersecurity and data-privacy exposure, and the challenges of retaining personnel and achieving sustained profitability. Management said macroeconomic and geopolitical events had not materially affected operations to date, but future effects remain uncertain.
- A securities class action filed in September 2023 remains pending and alleges misleading statements about revenue-growth drivers in 2021–2022. A separate securities class action was dismissed without prejudice in January 2024. The company cannot reasonably estimate possible losses beyond amounts accrued; the filing does not state a clear potential-loss range.
- In March 2024, the board authorized repurchases of up to $20.0 million of common stock. During the quarter, the company repurchased approximately 343,000 shares at a weighted-average $7.89 per share for $2.7 million.
- Subsequent to quarter-end, Eric Friedrichsen was appointed President and CEO effective April 29, 2024. Scott Hill was to serve as interim CEO through May 11 and then as Board Chair.
- The company’s $14.0 million Fastcase primary-law license is recorded as an intangible asset; amortization is to begin when it is available for intended use. Management planned to launch primary-law capabilities in 2024. Its Cecilia ediscovery chatbot had been released in the U.S. in Q4 2023.
Important facts for investors to verify
- Whether new-customer additions can offset continued usage declines among existing customers, given the predominantly usage-based revenue model.
- Whether operating cash burn and losses continue to improve, and how management’s 12-month liquidity assessment changes as cash declines.
- Progress, timing and customer adoption of Cecilia and the planned primary-law offering, including any effect on revenue, costs and margins.
- Developments in the pending securities litigation, related costs and any changes to the company’s estimate or disclosure of exposure.
- Actual execution and remaining authorization under the $20.0 million repurchase program, balanced against cash needs and investment priorities.
- Leadership transition, personnel retention and execution of the company’s stated expense and long-term profitability objectives.