Executive Summary / Key Takeaways

• CS Disco, Inc. is executing a strategic pivot under new leadership, focusing its AI-powered, cloud-native legal technology platform and services on high-value enterprise customers and large, complex legal matters to drive reaccelerated revenue growth.
• The company's differentiated technology, particularly its Cecilia AI suite and core ediscovery platform enhancements, offers quantifiable benefits in speed, accuracy, and efficiency, providing a competitive edge against rivals and forming a key part of its value proposition, "with you in every case."
• Recent financial performance shows modest revenue growth (3% YoY in Q1 2025) and continued net losses, but management highlights positive signals like increased usage from larger customers and improving software dollar-based net retention (100% in FY 2024).
• Management has increased its full-year 2025 guidance and targets Adjusted EBITDA breakeven by Q4 2026, contingent on successful execution of the refined go-to-market strategy and operational efficiencies.
• While facing intense competition from larger, more profitable players and navigating macroeconomic and legal industry uncertainties, DISCO believes its technological lead and focused strategy position it for long-term sustainable growth and profitability.

The Crucible of Legal Tech: Forging a Path with AI and Enterprise Focus

CS Disco, Inc. (NYSE:LAW) operates at the intersection of law and technology, providing a suite of cloud-native, artificial intelligence-powered products designed to streamline and enhance legal processes. From its inception in 2013, the company has focused on automating the often manual, time-consuming, and error-prone tasks within legal hold, legal request, ediscovery, document review, and case management. Its core value proposition centers on empowering legal professionals – spanning enterprises, law firms, legal services providers, and governments – to manage complex legal matters more efficiently, securely, and effectively.

The legal technology market is highly competitive and rapidly evolving, particularly with the increasing integration of AI. DISCO faces a diverse set of rivals, including large legal services providers like Consilio, Epiq, and KLDiscovery (KLD); legacy software providers such as Open Text (OTEX) and Relativity; and other cloud-based innovators like Everlaw. Many of these competitors boast greater name recognition, larger installed bases, and substantially deeper financial resources. However, DISCO aims to carve out its market share by leveraging its technological differentiation and focusing on specific customer needs.

At the heart of DISCO's offering is its cloud-native architecture and proprietary AI models. These technologies are designed not merely to automate but to intelligently identify relevant documents, improve review accuracy and speed, and allow for the reuse of data and work product across matters. The company's AI models continuously learn from legal work performed on the platform. This foundational technology supports its various products, including DISCO Ediscovery, DISCO Review (its AI-powered document review offering), DISCO Hold, DISCO Request, and DISCO Case Builder.

Recent technological advancements, particularly within the Cecilia AI suite, underscore DISCO's commitment to innovation. Cecilia AI includes capabilities like Cecilia Q&A, which allows users to ask natural language questions of their case data to quickly surface key facts and documents, and Cecilia auto review, designed to automate the first pass review of documents. The company has cited examples where Cecilia auto review demonstrated speeds equivalent to a 140-person review team, assessing 9,000 documents in a live database in just 2 hours—a task estimated to take 200 manual hours. Furthermore, in a government investigation involving nearly 3 million documents, a law firm client leveraged Cecilia Q&A and auto review to achieve 97% recall and 71% precision across almost 200,000 documents, delivered at unprecedented speed. These quantifiable benefits in speed and efficiency are central to DISCO's competitive positioning, offering a tangible advantage over traditional methods and potentially even some competitor tools, which one large law firm described as "light years ahead" of a major competitor's solution.

Beyond AI, DISCO continues to enhance its core platform with features like advanced reproductions and document-level Bates numbering, directly addressing customer feedback to streamline workflows on large, complex matters. The platform's scalability is evidenced by its ability to handle massive data volumes, producing over 1.2 billion pages in March 2024 alone, with a peak of over 51.6 million pages in a single hour. This technical prowess in handling large-scale data efficiently is a critical differentiator, enabling DISCO to target and serve the most demanding legal matters.

Despite its technological strengths, DISCO has historically operated at a loss, incurring net losses in each fiscal year since inception, including $55.8 million in FY 2024 and $11.4 million in Q1 2025. The company's financial performance is closely tied to customer usage, which can fluctuate based on the unpredictable timing and scope of legal matters. This usage-based model, while offering scalability, also introduces volatility, particularly impacting the DISCO Review service.

In response to these dynamics and internal challenges, including leadership transitions, DISCO has embarked on a strategic pivot under CEO Eric Friedrichsen. The core of this strategy is a refined go-to-market approach intensely focused on acquiring and expanding relationships with high-value enterprise customers – specifically, large corporations in highly litigious industries and Am Law 200 firms with significant eDiscovery needs. Management believes these customers represent a substantial untapped wallet share opportunity.

The strategic shift involves enhancing sales talent, aligning incentives towards growth and wallet share expansion, and rebuilding the customer success function to free up salespeople for new business acquisition. Operational improvements, including optimizing the quote-to-cash process and leveraging new senior leadership in operations and legal, are intended to support this focused strategy and improve efficiency. The company's new value proposition, "with you in every case," encapsulates this integrated approach, emphasizing that DISCO offers both cutting-edge technology and expert services to support customers across the full spectrum of legal matters, from self-service to large, complex cases requiring deep partnership. Early signs, such as increased usage from customers spending over $100,000 annually and growth in large multi-terabyte matters, are cited by management as positive indicators that this focused approach is beginning to yield results.

Financially, Q1 2025 saw total revenue of $36.7 million, a 3% increase year-over-year. Software revenue grew 3% to $30.9 million, while services revenue increased 2% to $5.8 million. The modest overall growth was driven by $4.5 million in revenue from new customers added since March 2024, offset by a $3.4 million decrease from existing customers due to lower usage in some accounts. Cost of revenue increased 7% to $9.5 million, primarily due to higher cloud hosting costs associated with increased software usage. Operating expenses totaled $39.8 million, resulting in a loss from operations of $12.6 million. Adjusted EBITDA for Q1 2025 was negative $5.1 million, an improvement from negative $5.2 million in Q1 2024.

Despite the continued losses, the company maintains a solid liquidity position, with $34.5 million in cash and cash equivalents and $84.3 million in short-term investments as of March 31, 2025, totaling $118.8 million, with no debt.

Management believes this is sufficient to fund anticipated cash requirements for the next 12 months and expects longer-term needs to be met through operating cash flow and available funds, though future equity or debt financing may be pursued for growth initiatives like acquisitions. Cash flow from operations remains negative, with $10.5 million used in Q1 2025, an increase from $7.3 million used in Q1 2024, primarily influenced by the net loss and changes in working capital.

Looking ahead, DISCO has provided guidance reflecting its expectations for the strategic pivot. For Q2 2025, total revenue is guided between $36.5 million and $38.5 million, with software revenue between $31.25 million and $32.25 million. Adjusted EBITDA is expected to be between negative $5.5 million and negative $3.5 million. For the full fiscal year 2025, the company projects total revenue of $146 million to $158 million and software revenue of $125.5 million to $131.5 million. Notably, this represents an increase in the full-year outlook compared to prior guidance. Management has also set a target of achieving Adjusted EBITDA breakeven by the fourth quarter of 2026, contingent on successful execution of their strategy to accelerate revenue growth and manage costs.

The path forward is not without significant risks. Macroeconomic uncertainty, including inflation and potential recession, could impact legal spending. Geopolitical events and specific executive actions targeting law firms could also affect customer usage. The competitive landscape remains fierce, with larger players potentially leveraging their resources to gain share or engage in price competition. Cybersecurity and data privacy risks are paramount, given the sensitive nature of the data handled, and any breach or perceived failure in compliance could severely harm the business and reputation. The rapid evolution of AI technology presents both opportunities and risks, including potential legal liabilities, reputational concerns from flawed outputs, and increasing regulation. Execution risk related to the strategic pivot, including successfully realigning the sales force and integrating new talent, is also a key factor. Furthermore, customer concentration remains a vulnerability, with a substantial portion of revenue derived from a limited number of large customers whose usage can fluctuate.

Conclusion

CS Disco, Inc. is undergoing a significant transformation, leveraging its core technological strengths in cloud-native AI to target the most valuable segment of the legal technology market. The strategic pivot towards large enterprise customers and complex matters, supported by a refined go-to-market approach and a commitment to innovation, forms the central investment thesis. While recent financial performance reflects ongoing losses and the challenges of its usage-based model, management points to early positive indicators and has raised its full-year guidance, signaling confidence in the strategy's potential to reaccelerate growth. The target of Adjusted EBITDA breakeven by late 2026 provides a clear financial objective. For investors, the critical factors to monitor will be the successful execution of the enterprise-focused strategy, the continued differentiation and adoption of its AI capabilities in large matters, and the ability to manage costs and navigate competitive and macroeconomic headwinds. If DISCO can effectively translate its technological lead and strategic focus into consistent revenue acceleration and improved profitability, it may unlock significant long-term value despite the inherent risks in the dynamic legal tech landscape.