CS Disco, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are to the three months ended March 31, 2022 unless otherwise noted. DISCO provides cloud-based, AI-powered legal software. Revenue is predominantly usage-based and may vary with the timing and volume of customer legal matters.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $33.1 million | $34.5 million |
| Gross profit / gross margin | $24.9 million / 75% | $25.5 million / 74% |
| Operating expenses | $47.1 million | $37.3 million |
| Operating loss | $22.3 million | $11.8 million |
| Net loss | $20.4 million | $11.8 million |
| Net loss per share, basic and diluted | $0.34 | $0.20 |
| Adjusted EBITDA, non-GAAP | $(13.0) million | $(7.8) million |
| Cash used in operating activities | $14.8 million | $11.4 million |
Revenue fell 4%. New customers contributed $5.4 million, more than offset by a $6.7 million decline from customers active in the prior-year period, primarily from reduced usage in managed review. Usage-based revenue was 88% of total revenue, versus 90%; subscriptions were 12%, versus 10%.
Operating expenses rose 27% in total. Research and development increased 28% to $15.8 million, sales and marketing increased 16% to $19.1 million, and general and administrative increased 44% to $12.3 million. Higher personnel costs, including stock-based compensation, were major drivers; Q1 2023 also included $1.0 million of restructuring charges. Stock-based compensation expense was $7.2 million, compared with $3.2 million.
Balance sheet and liquidity
- Cash and cash equivalents were $187.6 million at March 31, 2023, down from $203.2 million at December 31, 2022. Total assets were $241.3 million and stockholders’ equity was $211.8 million.
- Total liabilities were $29.5 million. The filing reports no borrowings; lease liabilities comprised $10.4 million of operating leases and $0.2 million of finance leases, current and non-current combined.
- Cash used in investing activities was $2.0 million, including $1.2 million paid for the Congruity acquisition; cash provided by financing activities was $1.2 million, principally reflecting $0.9 million of ESPP proceeds.
- Management stated that existing cash should fund anticipated requirements for at least the next 12 months.
Changes, outlook and risks
- Cash used in operations increased $3.4 million year over year, while net loss widened by $8.5 million. Management attributed the higher operating cash use principally to the larger loss, increased receivables, and lower accounts payable and accrued expenses.
- On January 19, 2023, DISCO committed to reducing its global workforce by approximately 9%, recording $1.0 million of Q1 restructuring charges. Separately, on May 9, 2023, it committed to a further reduction of approximately 47 employees (about 8% of its workforce) and 16 contractors. Estimated charges are $1.6 million to $1.9 million, mostly expected in Q2 2023.
- Management expects near-term research and development and sales and marketing expenses to decrease in absolute dollars; it expects general and administrative expense to remain relatively consistent with the prior year. It expects Adjusted EBITDA to improve over the long term. The filing provides no specific revenue or earnings guidance for the year.
- Key risks include unpredictable usage tied to legal case activity, declining usage among existing customers, customer concentration, competition, reliance on third-party cloud infrastructure, macroeconomic uncertainty, and data-security and privacy obligations. Management said macroeconomic conditions had not materially affected operations to date but could do so in the future.
- Remaining performance obligations were approximately $19.8 million at March 31, 2023, of which about $12.2 million was expected to be recognized over the next 12 months; these amounts are not necessarily indicative of future revenue growth.
- Management reported disclosure controls and procedures were effective at the reasonable-assurance level as of March 31, 2023. It reported no material litigation expected to have an adverse material effect.
Important facts for investors to verify
- Whether customer usage and revenue stabilize, particularly among existing customers and managed-review matters.
- Whether workforce reductions produce the expected cost savings, and the actual timing and amount of related charges.
- Whether operating cash burn and losses improve as management reduces expenses, while accounting for elevated stock-based compensation.
- How the $187.6 million cash balance changes relative to cash needs, lease obligations, and continued operating losses.
- How much of contracted performance obligations converts to revenue, given DISCO’s usage-sensitive business model.