Ladies and gentlemen, thank you for standing by and welcome to the CS Disco's Second Quarter of Fiscal Year 2021 Conference Call. At this time all participants are in a listen-only mode, all lines have been placed on mute to prevent any background noise. [Operator Instructions].

I would like to now have the conference over to your first speaker today, April Scee, with CS Disco Investor Relations. Please go ahead..

Good afternoon and thank you for joining us on today's conference call to discuss the financial results for Disco's second quarter fiscal year 2021. With me on today’s call are Kiwi Camara, Disco's Co-founder and CEO; and Michael Lafair, Disco's Chief Financial Officer.

During today's call, we will review our financial results for the second quarter fiscal 2021 and discuss our guidance for the third quarter and full year fiscal 2021.

Today's call will include forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to statements regarding our financial outlook, including our guidance for the third quarter and full year of 2021, our market opportunities, market positions and growth opportunities.

In addition to our prepared remarks or earnings press release, SEC filings and a replay of today's call can be found on our IR website @ir.csdisco.com.

Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. Forward-looking statements represent our management's beliefs and assumptions only as of the date made.

Information on factors that could affect the company's financial results is included in its filings with the SEC from time-to-time, including the section titled risk factors in the company's prospectus filed with the SEC, pursuant to Rule 424(b) on July 22 2021.

Additional information will be made available in the company's quarterly report on Form 10-Q for the quarter ended June 30 2021. In addition, during today's call, we will discuss non-GAAP financial measures.

These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

A reconciliation between GAAP and non-GAAP financial measures and a discussion of the limitations of using non-GAAP measures versus their closest GAAP equivalent is available in our earnings release. With that, I'd like to turn the call over to Kiwi..

Thanks, April. Good afternoon and welcome to our first earnings call as a public company. I am incredibly excited to be speaking with all of you and introducing Disco to those of you unfamiliar with us. I will spend some time discussing our company, our market and our strategy. But first I wanted to point out a few financial highlights.

We had an excellent Q2, with revenue of $29.5 million, up 88% year-over-year, driven both by strong usage across our customer base and an increase in new customers.

With this rapid growth, we continue to demonstrate operational efficiency with Q2 adjusted EBITDA margins of negative 5% compared to negative 28% in Q2 of the prior year, up over 2,200 basis points. For those of you new to Disco, I would like to provide a little bit of background on what we are working to achieve.

Before launching Disco in 2013, my partners and I were building a corpus litigation practice in Houston, Texas. As a lawyer, I was struck by how antiquated the entire legal process was. If you walk the halls of legal departments or law firms, you will notice that the vast majority of time is spent on tasks that do not require any human legal judgment.

And so the idea was born to create a modern AI powered solution that would allow lawyers to automate a ways the parts of the practice that don't require human legal judgments. If you look at any company's P&L, regardless of industry, they all invest in core operational functions, engineering, marketing, sales, HR, IT, finance and legal.

Almost all of these functions have corresponding software companies that power them, but that is not true for legal. Our goal is to become the software company that powers the work of legal departments.

Today in every major legal matter, corporations have to go through large collections of enterprise data to figure out what really happened and to find the FMs ready to prove it, so they can comply with the regulatory requirements and achieve optimal legal outcomes. This is the problem that our solution solves.

Think about the massive amounts of data created every day. PDFs, Word documents, Excel spreadsheets, emails, instant messages, video and voice recordings, to name a few. Lawyers have to be able to extract only the most relevant information from that mountain of data.

A gap exists between that raw data and the work lawyers need to do, such as producing documents for regulators and executing a litigation strategy. Before Disco, that gap was bridged by an expensive, complicated, opaque and insecure set of on premise point solutions and professional service vendors. We are disrupting that status quo.

We have built a software system of record that allows for handling enterprise data in legal matters. This solution has three basic parts.

The first is a data lifecycle engine that allows legal industry participants to collect enterprise data from all enterprise systems of record, process and enrich that data and store it through the life of multiple legal matters.

The second is a review platform that allows lawyers to organize the work of conducting legal document review to determine what the facts are. And the third lets lawyers take a legal action, for example, by producing relevant data to regulators and complying with discovery obligations. We have built three products on this platform.

First is Discos ediscovery, which is both the system of record for enterprise data used in legal matters, and a system of engagement where legal professionals engage in all the work related to reviewing organizing and producing documents. Second is Disco Review, where we use Disco AI to automate the process of legal document review.

And third is Disco's case filter, which is a system of records and engagement for all non-documents evidence. This is a way for lawyers to prepare and organize witness statements, deposition, testimony, and transcripts of court hearings, among other things.

Together, these products enable lawyers to focus on practicing law and providing the best outcomes for their clients not dealing with enterprise data.

Today, our solution manages the document discovery process for mission critical and well known legal matters and for some of the largest corporations and law firms in the world, our customers find tremendous value in our solution.

A great example of what has driven the acceleration and growth this quarter is a well-known consumer brand set in Q4 of last year, hired a new Deputy General Counsel for the major technology company that had been a long standing Disco customer.

He ran the sole source procurement for ediscovery when he started his new job and between the fourth quarter of 2020 and the first quarter of 2021, his new company migrated their ediscovery program to Disco ediscovery.

Than in the second quarter of 2021, this company experienced a series of major legal issues that caused them to accelerate their adoption of our second product Disco Review. So in three quarters, we saw this company ramp from zero to a multimillion dollar level of spend. That journey has historically taken our customers several years.

This is a great example of the impact that lawyer mobility can have on our business. Lawyers who have been through the disk adoption journey at one company can accelerate Disco's adoption in their new company.

Another example of rapid adoption is a leading global travel company that joined our solution in Q2 and grew to be a million dollar plus customer in the quarter. We are a key partner for these customers, a mission critical solution. And we are proud to help them through some of their most difficult moments. We are attracting a large and growing market.

According to Statista total spend on legal services is expected to be $767 billion in 2021. The ediscovery market is about $15 billion, according to IDC. By our internal bottom up calculation, we believe the total addressable market for our solution is $42 billion.

Overall, we believe the growth of regulation around the world global operational complexity, enterprise data growth as well as the rise of a new generation of legal professionals are all driving the demand for modern AI powered solutions to help with these challenges in a scalable and sustainable way.

As a company Disco combines world class engineering with a deep understanding of the law and how lawyers work and think, in order to build product experiences that feel magical to lawyers. We prioritize legal workflows, and intuitive user interface in everything we create.

Our rapid growth today demonstrates how our product vision resonates with customers. We are very early in our growth cycle in a very large market. Our priorities are to win new customers, expand Disco usage within existing customers, and expand the adoption of Disco Review and Disco Case Builder.

To close it off, our IPO in this first earnings call are only the beginning for Disco. Although we already have a category defining solution, we believe our work has just begun to develop technologies that strengthen the rule of law. Now I'll turn it over to Michael to go through our financial results..

Thank you, Kiwi. Before I discuss the results and guidance, I would like to spend some time discussing our unique, powerful business model. We generate substantially all of our revenue from our customers' usage of our solutions.

Our revenues are based on our customers' actual usage of our solution, and a customer's usage can fluctuate based on the number and nature of legal matters they have at any particular time. We make it incredibly easy for customers to get started with Disco with a simple contract, without long-term commitments.

Our simple and transparent pricing model allows customers to easily adopt our solution and scale their usage. In most cases, customers do not know the amount of usage needed at the time they initially contract with us, because they generally do not know how many documents will need to be reviewed in a legal matter until later in the legal process.

We billing those customers monthly based on their current usage. Because of this dynamic, we do not focus on traditional SaaS metrics like billings, or remaining performance obligations, but rather we focus our attention on total revenue growth. Now let's discuss our results and guidance.

As Kiwi mentioned, Q2 revenue was $29.5 million, up 88% year-over-year. We had strong performance across the board, including continued adoption and expansion of Disco ediscovery and accelerated adoption of Disco Review.

In discussing the remainder of the income statement, please note that unless otherwise noted, all references to our expenses, operating results and share count are on a non-GAAP basis. Our total gross margin was 71%, consistent with 71% in Q2 of the prior year.

Sales and marketing expense was $10.6 million or 36% of revenue, compared to 45% of revenue in Q2 of the prior year, while down year-over-year on a percentage of revenue basis, on a dollar basis, this is actually an increase of over $3.5 million, as we continue to scale our go-to-market organization.

Research and development expense of $7.6 million or 26% of revenue, compared to 38% of revenue in Q2 of the prior year. General and administrative expense was $4.7 million or 16% of revenue, compared to 19% of revenue in Q2 of the prior year.

Operating loss was $2 million, representing a margin of negative 7% compared to negative 31% in Q2 of the prior year.

Adjusted EBITDA was negative $1.6 million in Q2, a margin of negative 5% compared to a margin of negative 28% of the prior year, the operating margin and EBITDA margin leverage we demonstrated with the result of both strong revenue performance and operating expense dynamics of the prior year quarter, in which we undertook operational efficiency initiatives in response to the COVID-19 pandemic.

Net loss was $2.1 million versus $5 million in the prior year. Net loss per share was $0.16 versus loss per share of $0.38 in the prior year. I will now turn to the balance sheet and cash flow statement. We ended Q2 with $47 million in cash and cash equivalents.

In July we raised $223.2 million proceeds in our IPO, net of underwriting discounts and commissions. Operating cash flow year-to-date was negative $10.2 million compared to negative $15.1 million a year ago. Now turning to the outlook.

For Q3 we're providing revenue guidance in the range of $25.5 million and $25.9 million representing year-over-year growth between 43% and 45%.

As I mentioned previously, we have a usage based business model, so there's inherent volatility from quarter-to-quarter as customers legal matters begin and expand and shrink, and as activity in those matters increases and decreases usage of our different products.

We saw how this volatility can create outsized growth in Q2, where we saw 88% year-over-year revenue growth. As you can see from our guidance, you should not expect this level of outsized performance in every quarter.

We're providing adjusted EBITDA guidance in the range of negative $11.1 million and negative $10.3 million representing an adjusted EBITDA margin of negative 42% at the midpoint. We do anticipate operational costs to grow over the next several quarters and next year as we continue to invest in our products, and go-to-market team.

On a full year basis for fiscal year '21, we're guiding for revenue between $103.5 million and $104.3 million, representing year-over-year growth between 51% and 52%. We expect adjusted EBITDA between negative $24 million and $22.9 million.

In summary, we're hyper focused on transforming the legal industry, and enabling legal professionals to provide better advice and outcomes for their clients. We're doing this by continuing to invest in cutting edge technologies to maintain our product leadership position and continuing to grow our business both in North America and internationally.

We are quickly becoming a must use tool for legal departments around the world and we are confident that this momentum will continue. I'd like now to turn the call over to the operator to open up the line for Q&A. Operator..

[Operator Instructions] The first question is from Sterling Auty with JP Morgan. Please proceed..

Yes, thanks. Hi, Guys, and welcome to the public markets.

Maybe just to get kicked off, my first question would be about that large consumer customer that you mentioned and kind of your comments about the business model and the variability it can generate, what are some of the things that you're doing to drive increased usage, to try to, let's say smooth out some of the volatility that you might see from a single customer, quarter-to-quarter?.

So, each of our customers goes through an adoption journey that has historically taken several years. And typically they'll start out as a kind of mid to upper five figure customer grow to be a six figure customer and then grow to be a seven figure customer at maturity.

Over the course of that journey their specific legal usage will fluctuate and that will cause fluctuations in the revenue received from a particular customer. Now as Disco grows our overall revenue base, the impact of any particular customers fluctuation and usage on our overall revenue becomes smaller and smaller.

And so we would expect Sterling that as our base grows more of these specific customer usage fluctuations wash out in the aggregate. In terms of what we're doing to drive expansion, this is obviously a huge focus for us.

What we're seeing in Q2 and in general in the more recent quarters, is that customers have taken this journey which used to take multiple years and shortened them dramatically. So what we're seeing with that customer is a customer that went from zero in Q4 of last year to multi million dollars of revenue over three quarters.

And over the course of that journey has shifted their ediscovery program to Disco both in terms of adopting our Disco ediscovery product and then more recently Disco Review. We think this is something that's super promising about the business.

As people through lawyer mobility switch companies, they take their history of Disco adoption with them and as a consequence it accelerates that revenue growth curve for logos that we've been adding more recently..

That makes a lot of sense. And then one follow -up question. How would you characterize, you had significantly increased your go-to-market resources, meaning sales headcount.

How are those resources ramping relative to your expectations and versus what you've seen in the past?.

Yes, we're delighted. So if you look at Q2, we really saw outperformance across every aspect of the business no matter how you slice it. So we really started this S&M ramp in Q3 of last year, when it became evident that the impact of COVID on our business was limited.

And so already in Q2, you see some impact from those reps who are hired in Q3, Q4, and even Q1. We're seeing them perform well, in excess of the historical performance for reps in the relevant tenure bands, we’re seeing some nice things in terms of win rates, not just for new reps, but for all reps,.

We're seeing acceleration more recently in lead generation and how those leads are flowing through the funnel. And we're seeing increased performance from our customer success team, one of their primary jobs is to help our clients identify opportunities where they would benefit from more Disco products.

So growing the relationships from, for example, Disco ediscovery to begin with them Disco Review, and Disco Case Builder, which can have the impact of multiplying their spend with us.

So overall, we're really pleased with how the ramp in our go-to-market investments is going and we expect to continue stepping on the gaps there given the context where we think we have the best solution in the market, where overall tailwinds in the market are going in our favor as the industry shifts from services to software and from on-prem to cloud.

We think now is the time to really invest in growth..

That sounds good. Thank you..

Thank you, Mr. Auty. The next question is from Koji Ikeda with Bank of America. Please proceed..

Hey Kiwi, hey Mike. Really nice first quarter out of the gates here. Thank you for taking my questions. Couple from me, first one. Now that you're public, I guess how things have changed in terms of overall market awareness.

Have you seen any meaningful change and maybe the volume of interactions or inbound between customers, prospects and partners out there?.

Yes, we've been delighted Koji. I think being public gives our larger customers' confidence that Disco is a company that has the resources and the longevity to partner with over the long-term.

What we're hearing from customers is everybody agrees that software is coming to legal, that legal is going to be like every other business function, where software transforms the way the department works, by enabling the automation of tasks that don't require human legal judgment, so that lawyers can focus on things that are more valuable, and are the kinds of work they went to law school to do.

And so when we engage with customers, we're talking not only about our current offerings, where, of course, we think we have great things to talk about, but we're also talking more generally about, look, if I'm a General Counsel over the next three or five years, technology is going to be a much bigger part of the way I do my work the work of the legal department, and I need a technology company I can partner with to think about how we'll go through that journey together.

Those kinds of conversations Koji, I think we're really accelerated by not only our going public, but this sense and increased confidence that Disco can be a long-term partner for our clients. I'll also point out, just recently, we had ILTA.

It's one of the two big conferences in our space in Las Vegas and it was in-person limited attendance, but still in-person. And we were delighted by our ability to engage with many large existing customers, large new customers.

I think to your point about increased inbound, we were really delighted by the level of traffic at our suite meetings at our events, even at our booth on the conference floor with people who were really interested in learning more about what we're up to..

Got it. And then one question for Mike, maybe I missed it.

But did you happen to give the total customer number for the net revenue retention rate?.

Yes. So thanks, Koji. Appreciate the question. So we were really pleased with our customer growth in the quarter, both in terms of total number of new customers as well as the expansion of our existing customers. As you can see with the results, it was a very, very, very strong quarter all around.

We're not disclosing a specific customer count number or the DNR at this time, but we were really pleased with the growth overall..

Got it. Okay. Thanks for that. And just last question from me. So in this quarter, clearly very, very strong growth here 88%, adding $8.4 million sequentially. I guess, there must have been a couple of big deals that came onto the platform with a lot of data.

So how should we be thinking about the visibility of that revenue stream tied to that data? I mean, I guess the data gets taken off at some point, right.

So now how do we think about the visibility of that data? When could it potentially come off? And how are your customers talking with your sales people about that data stream, so we can be prepared for that?.

So I think if you look at Q2, that 88% year-on-year growth gives you a sense of just how good can be, when absolutely everything in our business fires on all cylinders.

There was no particular driver of the outperformance in Q2, whether you look at new customers, whether you look at increased growth from existing customers, whether you look at faster adoption journeys, like the two examples, we talked about in our prepared remarks.

Whether you think about growth internationally, or growth in the United States, whether you think about growth in the core Disco ediscovery product, or increased adoption in Disco Review, all of these things were really firing on all cylinders, and there isn't a single driver of growth in Q2.

In terms of how we have insight into our customers data usage. Look, we obviously internally have the bottoms of forecasting insights where our customer success teams and sales teams have deep relationships with our clients.

We have telemetry that gives us insight into the legal matters going on into the platform and we use all of that to form a picture that gives us visibility and confidence in how the legal needs and resulting data of our clients will change over time.

I think the other point is the point I made with Sterling, which is that as Disco gets bigger and bigger as our customer base expands, and as more of our customers become mature, the impact of a fluctuation in data usage from any particular customer becomes a smaller and smaller part of our overall revenue base..

Got it? Thank you. We appreciate it. Congrats on a great first quarter. Thank you so much..

Thanks, Koji..

Thank you, Mr. Ikeda. The next question is from Tyler Radke with Citi Group. Please proceed..

Hi, this is BoYoung Kim on for Tyler from Citi. So the second quarter revenue growth was incredibly strong and even if you take out that one large customer and I know that wasn't the only one but as you said it was firing on all cylinders.

So wanted to better understand the overall demand trends and ask you to what extent did you see benefits from pent up demand after some giveaways that occurred during the pandemic, whether that be from court closures or delays in enterprise data collection? And how do you see that kind of pent up demand if you saw any pushing into the latter half of this year? Thanks..

It's interesting. I think one thing we learned from COVID, is that our solution really is mission critical to our clients and they actually have relatively limited control over the timing of legal events that drive usage in our platform.

So if you look at the impact that COVID had, we had one sequentially flat quarter last year and then Q3, Q4, we saw rapid reacceleration. And so I think when you look at Q2 of this year, it's not so much driven by pent up demand, because customers really could not just hold their legal matters, and then suddenly released them in Q2.

But I think what we are seeing is something related to that, which is COVID demonstrated to legal departments that they absolutely needed a strategy to go to the cloud, that they needed a way to get enterprise data into legal review, even when people are working remotely when the law firms that are collaborating with a remote when IT people who had previously been involved in collecting data by hand or remote and so on.

And so that's a tailwind, the shift from services based solutions that rely on in-person services to a software based solution that doesn't depend on that and the shift from on-premise solutions to cloud solutions.

Those are tremendous tailwinds that are driving clients to say, look, I know we're going to the cloud, maybe before COVID we were going to the cloud in three years or five years. Now we need to go to the cloud in six months, one year or two years. So I think that's where we're seeing driver of demand coming out of COVID..

Great, thank you. And then I also wanted to ask about wallet share gain opportunities, larger law firms that might have multiple ediscovery solutions in place.

What did you see over the past quarter in terms of wallet share gains firms with multiple solutions? And what initiatives do you have in place to drive that, especially considering that like on the law firm side, they're billing based on hours.

So what's really the incentive for law firms to increase their usage of an efficient solution from Disco? Thanks..

So it's pretty rare for a law firm to pay us out of its own pocket. The way to think about law firms is that every time we sell to a corporate legal department, that's the budget we tap into, that corporate legal department will be represented by one or more law firms.

And one of the things we've always focused on in Disco is bringing together this unique combination of world class engineering coupled with a deep understanding of the way lawyers work and think to build product experiences that feel magical for lawyers.

So we sell our solution to the legal department, we don't charge for users, as a consequence, the legal department will add lawyers from the law firms that are represented as users. And then those lawyers -- going to your question, will have the side-by-side experience of using Disco for that client, and using competitive solutions for other clients.

And very, very often the reaction those lawyers have is, wow, I really prefer Disco. And so what they do is they go tell their other clients about disco.

And they use examples from their first client about what impact adopting our technology can have on being more efficient in the handling of cases, getting to actionable evidence more quickly, reducing the overall spend on legal document, review and sell off. This does two things for the lawyer at the law firm. First, it makes them look good.

They're going to their new client and telling them how they can handle legal matters much more efficiently. And as a consequence, it helps them win business in the hyper competitive market for legal services. And second, more selfishly, it gets the lawyer to be able to work on the solution that they prefer working on, which is Disco.

So that's how to think about law firms in our business. They sort of sit at the center of this nexus of talent in the legal industry, where we sell to a legal department, they add users from the law firm, the users from the law firm love it. And as a consequence, they introduced us to their next client.

And that plan introduces us to other law firms, and so on throughout the industry. Now, there are of course, many 10s of 1000s of companies out there, that could be Disco customers, and in the United States, the largest law firms, that's the Am Law 200.

So even if you have relatively early penetration in terms of the number of corporate legal departments that are using Disco, you will wind up working with virtually all of the Am Law 200 law firms and we disclose the exact number in our filings. That's why you will see law firms using multiple solutions because they have multiple clients.

As we grow the number of corporate relationships that we have, that will translate into increasing share of views at the law firms..

Thank you so much..

Thank you. The next question is from DJ Hynes with Canaccord. Please proceed..

Hey, thanks, guys. Congrats on the good start here. Kiwi one for you. I think during the IPO process, you talked about win rates that are actually higher against other cloud providers than they are versus the legal service providers that are typically leveraging legacy technology. It seems a bit counterintuitive when you see that first.

Maybe you could just talk about why that's the case and how it influences your go-to-market strategy?.

I think some of it is segmentation of the market. Our strategy has always been to go after large enterprises and the law firms that represent them who are handling some of the most important complex legal matters in the world. And some of our cloud competitors, I think, have had other visions for the right way to approach the market.

I wouldn't want to speak for them. But I think their focus is sometimes on very specific niches, for example, plaintiff’s law firms, or kind of small internal investigations, things of that nature. And so if you look at our win rate data, obviously we're selling into the big ticket kind of large enterprise for large legal matters.

When we see some of those other cloud companies, they may have a solution that is not as well suited to those kinds of use cases. And that may translate into higher win rates.

Taking a step back, though, DJ, I think the overall trend we're seeing across our business is an acceleration in win rates period, across every segment of the market, and across all the different types of competitors. That's one of the things that no doubt contributed to our outsize performance in Q2.

And one of the things that's really giving us growing confidence about accelerating our investment in go-to-market..

Yes, makes perfect sense on top of color. Michael a follow-up for you just on the Q3 guidance. And I just want to be perfectly clear here given it's a usage based model, we're in this unique situation of kind of guiding in the third month of the quarter.

Is there anything you're seeing that suggests usage has materially slowed from Q2 levels? Are you just being prudent given it your first quarter outpost IPO?.

Yes, it's great to hear your voice. So we are trying to be prudent in our guidance, and also just remind as you know, for usage space.

So while we're two months into the quarter, there's still almost a month left and so that's we're usage based, as you probably know, from reading the S-1 and you'll see it in the queue, roughly 88% of our business is usage base where the balance is subscription.

So we're trying to be prudent, we feel really comfortable about our guidance and we want to just be prudent as a first time out..

Yes, makes sense. Thank you guys and congrats..

Thank you, Mr. Hynes. The next question is from Derrick Wood with Cowen & Company. Please proceed..

Oh, great thanks and congrats on just a great quarter. First one, I guess, Kiwi, you mentioned one of your secular drivers is growth in the regulatory environment.

And just curious, are there any specific verticals to call out that are facing increased regulation or litigation, and perhaps you could talk about the opportunity within the banking and financial services market, because that's traditionally a vertical that spends a lot on software?.

Absolutely. I think one of the trends that you see everywhere in the world is that we have a tendency to create more laws and more regulations every year, and very little incentive to get rid of the old ones. There's a great paper by Saul Levmore from the University Of Chicago Law School that describes this as an addiction to law.

And of course, in addiction to law is terrific for Disco. So that's the secular trend, you get more and more regulation every year and the more regulation there is, the more that drives investigations and litigation. And the more of that there is the more usage there is of our platform, and the better it is in terms of revenue growth.

To give you an example, think about over the past few years, the dramatic increase in privacy regulation, and also how the privacy regulation varies across different jurisdictions around the world. Think about California Privacy Act, think about GDPR, and so on.

We saw tremendous growth in the European business, both in Q2 and more generally, in the past few quarters. And one of the drivers of that growth has been large corporations in the EU, looking for a more efficient way to handle data subject access requests under GDPR.

So that's an example very concrete, one of where regulatory change creates new categories of legal work that require the use of our solution, and in particular require a way to deal with large volumes of requests, targeting large volumes of enterprise data in a way that's automated leveraging Disco AI.

With respect to financial services, obviously, GDPR is applicable to those companies and we've seen lots of adoption in that area. More generally, we actually see some of our large clients in that vertical think about using Disco for ongoing compliance use cases.

So it's not that there's a specific investigation or a specific piece of litigation, but rather there's a desire to monitor the communications that are happening inside the business, and with partners, competitors, and so on, in order to proactively identifies legally problematic documents so that the compliance or legal department can take appropriate steps before a formal legal issue comes up.

So that's one driver specific to that industry that we think will power growth..

That's helpful.

Thanks and either Kiwi, or Michael, but can you remind us how aggressive you guys plan to be with hiring through the second half, particularly on the sales front? I don't know if you furlough kind of rough growth numbers and you'd like to be in terms of actually in the year with sales capacity versus year ago level?.

We're not giving specific numbers. But I can tell you DJ that based on what we're seeing, not just in Q2, but also more recently, our appetite for investing in go-to market is going up, not down.

We think big picture, we're very early in the overall growth curve of our business, we think we have the winning solution at a time when the overall industry is shifting in our direction. There’s shifts from services to software, from on-prem to cloud.

And so we think now, specifically over the next 12 to 18 months is the time to really invest in scaling out our go-to market capacity and acquire share in this market..

Got it? Thanks for taking my questions..

Thank you, Mr. Wood. The next question is from Scott Berg with Needham. Please proceed..

Hi Kiwi, Michael. Congrats on the great start here. I guess two questions for me. First of all, one of the questions that can perpetually get is on the evolution of cloud solutions in this market.

While you touched on that competitive cloud solutions earlier, Kiwi how do you feel start thinking about where the cloud evolution is truly touched the ediscovery and litigation markets today?.

Well, I think there's a couple of things to talk about there. One is the desire for remote work and collaboration, which has been very difficult to achieve with legacy solutions for a number of reasons. One is that the legacy solutions or services space, and so they require people to do things like go physically into the enterprise and collect data.

And second is that the solutions are on prem. And so you would have these situations where people are actually shipping hard drives back and forth, to teams of people doing manual data operations, manual project management, and so on.

And so how does cloud change that kind of historical status quo? Well, number one, enterprise need is moving to the cloud generally. So when you have a cloud ediscovery solution, you can collect that data sometimes without the data ever leaving the cloud.

So it's a dramatically better way of hooking into enterprise data that gets rid of a lot of that human data collection work. Second, because it's an integrated cloud solution, it just naturally supports remote work and collaboration.

So many companies, and many law firms sent their people home, and even those that have since come back, legal is a highly networked industry, where our legal department will be working with multiple law firms and inevitably, some of those people are still at home. And they're also geographically dispersed more so after COVID than before COVID.

And again, a cloud based solution makes all those things better. But that's kind of the table stakes. Let me talk to you a bit more about the kind of more profound technology shifts that the cloud is bringing about.

So if you talk to customers, and ask them about legacy solutions, you'll be surprised to hear that actually, performance still remains a huge pain point with many of these legacy solutions, and what's going on there, is that legacy systems have not been able to keep up with the exponential explosion in the volume and variety of enterprise data and the velocity with which it's created.

When I got started as a lawyer, 20 years ago, a big case might have been 100,000, maybe a million documents. And then email exploded and a big case became a million to 10 million documents. And now in addition to email, you have messaging data, application, data, voice, video, chat, and so on and a big case can be 100 million documents.

And the old systems simply couldn't scale to keep up with that load. What this cloud bring to that problem? Well, this is really the magic of cloud, and its elastic compute in the cloud. Disco is one of the largest users of Amazon Lambda, Amazon Serverless compute product.

And this lets us do things that were basically impossible to do with on-premise software where we can spin up the equivalent of hundreds of 1000s, maybe millions of servers in order to build spike compute capacity that lets us deal with huge incoming and outgoing streams of data that differ in their nature, their type, and thus different in the kinds of processing steps that are required.

So you can better deal with search capacity. You can also do things like apply modern approaches to artificial intelligence, which as you know are extraordinarily compute intensive.

But because we have access to fleets of GPUs that we can buy for small units of time, we can do things like run these super intensive machine learning algorithms to make very specific predictions about fine grained legal issues, like the relevance to a Foreign Corrupt Practices Act claim, or the relevance to a fraud claim.

And we can do this, not only once, but we can update these things continuously as we get more signal from lawyers and doing their work in our platform. And we can do it not just in specific matters, but across all portfolios of matters, enabling this AI system to learn from the aggregate of data and work products that's happening in our platform.

These are things that were technically infeasible before they move to the cloud. And so what's the impact of cloud? I think it's going to be pretty profound. It transforms not just the way people work, but it actually changes what's possible..

Got it, very helpful. And then I guess from a follow-up perspective, law firms, as you kind of touched on before have been a great referral partner for you, as you built the company over the last several years to obviously gain customers.

But how do you engage with them to sell the broader suite outside of just ediscovery? You have like to disclose kind of a contract Lifecycle Management Platform specifically for the legal industry? But can you leverage those individuals to also sell things like, Review and Case Builder for you going forward?.

Absolutely. If you think about what this is just very high level, what do we do? We use technologies to enable a much more efficient approach to the delivery of legal work.

And so how do we work with a law firm? Well, for a law firm, a law firm is in the business of competing in the hyper competitive market for legal services, by convincing clients that the law firm can handle their legal work in a way that drives better legal outcomes and does so much more efficiently.

And traditionally, law firms have done that by touting the expertise of their partners and the training they give to associates and the relationships they've built over time, and the investment they make in learning a specific client's business in an industry.

What Disco go does is give partners that those law firms one more super impactful tool in their arsenal to win business. And that's the use of technology to automate away large parts of the practice of law that don't require human legal judgment, leading to better and more efficient outcomes for the corporate clients.

So our primary audience is, of course, the end buyer. That's the corporate client, and we talked to them about the efficiencies being driven by technology. But law firms are equally motivated at the champion Disco solutions.

Because when a law firm is more efficient in delivering services to a client, it makes the law firm more competitive in the overall market for legal services. Now, that's the business answer. I'll also tell you what we're hearing on the ground, which is bottom line lawyers and law firms love using our solution. They personally love it.

And they hate often using the solutions that they use before. And that is magic. This is what sometimes business people called consumerization of enterprise software.

But in plain English, it's the idea that if you combine world class engineering with it, in our case, a deep love and respect for the law, understanding of how lawyers work and think then you can uniquely build these product experiences that feel magical for lawyers, and setting aside that business, they just want to use Disco..

Wonderful, thanks for taking my questions..

Thank you, Mr. Berg. The next question is from Parker Lane with Stifel. Please proceed..

Hi, Kiwi and Michael. Thanks for taking my questions. You've done a tremendous job of transforming the industry through ediscovery. But I was hoping you could talk a little bit more about what the tipping point is for customers as they contemplate adding Review and Case Builder into their existing engagement.

And maybe what pace of adoption is getting to that solution over the last six months or so?.

So we're delighted by the growing adoption of products two and three Disco Review and Disco Case Builder. And often what we see, it's part of this more general journey that clients are on to figure out what kinds of legal work actually require the exercise of human legal judgments, and what parts of work don't.

Our growth story, not just for the next six months or the next year, but for the next 10 years, or 20 years, is about taking on more and more of the $767 billion market for legal services, where quite frankly, a lot of the things that lawyers are doing today are not things they want to be doing, there are not things they went to law school to do.

And there are not things that require human legal judgment. So what's the tipping point? Why does someone expand their usage from Disco ediscovery to Disco Review and Disco Case Builder, it's because they see the ability to use our platform to automate the next category of legal work and the next category of legal work and so on.

And that we think is going to continue well beyond just our first three products. When we think about introducing more products over time, the idea is to build things that are applicable to more and more categories of legal work, increasing the breadth of things that we're able to partner with legal departments on doing..

Got it.

Coming up a really solid quarter here in the second quarter, how is that performance recently and all the trends you're seeing domestically informing the way that you think about international investments? And then can you remind us, what a large enterprise is thinking about in terms of cross border use of the platform today?.

We're seeing acceleration, not just in the U.S., but also internationally. And so when we think about what's driving our growing appetite, and it's definitely growing for investing internationally, it's less actually the growth of the U.S. business and more just the growth of the international business, which has been on fire.

What's interesting about our clientele, we serve very large enterprises, typically, and then the law firms who represent them. And if you look at both of those kinds of clients, they're generally multinational.

So well before we had an office in London, we had American multinational clients using our solution on legal matters that were cited everywhere in the world, from South Africa, to Korea, to China, to Japan, to all over Europe, and so on.

And we also have the opposite, we had Japanese multinationals, Korean multinationals, whose first encounter with Disco was for handling U.S. cited litigation or regulatory matters, again, long before we had an international presence.

And so the way we thought about launch in London a few years ago, was actually less targeted on the local London market and more about simply following our American clients, both literally the clients, but also the law firms who represented them.

As you know, most of the large law firms now have offices all over the world, and represent clients all over the world. And so when we take advantage of that highly networked nature of the legal industry to spread, that's, again driver of international expansion. Now, what we discovered once we were on the ground in the UK is tremendous local demand.

And we're generally what we're seeing, actually, in some of the non U.S. markets, is that in many of these markets you have people who are going straight to the cloud. It's not that they've built up a big relationship with one of the incumbents kind of services based providers is that they're just going directly to a cloud solution.

And so that's different and good for Disco in terms of international growth..

Very helpful. Congrats on the quarter. Thanks again..

Thanks so much..

Thank you, Mr. Lane. The next question is from Brent Thill with Jeffries. Please proceed..

Hi, Kiwi. Many questions from investors around the size of your market and ediscovery versus becoming the broader law software story.

I'm curious if you can maybe help explain, your view of the current segment that you're serving across these three segments and how long you could go before you feel that that you could actually theoretically run out of opportunity? And then I had a second, follow-up from Michael..

Sure, let me address that in a few ways. First directly market its size. So according to IDC, the ediscovery market is $15 billion who spent today and the bulk of that spend is going to the incumbent kind of services heavy solutions that Disco replaces every day.

So our core market for our original product, just Disco ediscovery is about $15 billion, which obviously gives us lots of room to grow, before thinking about expanding beyond the ediscovery. But of course, we already have expanded beyond ediscovery.

With our Disco Review and Disco Case Builder products, what we're seeing is that customers that had gotten to maturity, the seven figures spend on the ediscovery product, those customers can actually 2x or more their spend by adopting our second and third products.

And we're seeing that not just for our largest customers, but also for customers who are early in their adoption journey. So we think the impact of Review and Case Builder can be multiplier in terms of the addressable market.

We included in our filings that kind of bottoms up calculation of market size, which is based on the actual spend of Disco customers today, in different size buckets, times the number of companies in those size buckets according to a third party source. And that number is $42 billion.

So we think there's a tremendous amount of runway, just in terms of raw market size. The other way to think about it is expansion of existing accounts.

As we've talked about, historically, the account expansion journey from five figures to seven figures, has taken multiple years, three years, four years, five years, we're seeing that pull forward more recently. But even with the pull forward, we have tons of customers who are early in or in the middle of their adoption journeys.

And if all we did was taken those customers to the size of say our 20th largest customer that provides many, many years of growth, even at the kinds of growth rates that you saw in Q2. And of course, at the same time, as we're growing those accounts, we continue to add new logos at a very strong pace.

So big picture, we think we're super early in our growth curve in a huge market that is shifting in our direction, away from services to software, away from on-prem to the cloud. And that's what's driving our willingness to invest in go-to-market..

And Kiwi, just to confirm, Review attached, is that still somewhere in the mid-teens as it relates to ediscovery?.

We're not disclosing specific attach rates, I can tell you we're delighted both by the kind of just straight growth of the Review product, as well as the increasing propensity of customers to be multi product customers across the ediscovery, Review and Case Builder..

Okay, and just a quick follow-up for Michael. I think on your quota carrying to sales team, you were somewhere around 55 to 16 year goal was to add roughly 10 a month from here on out.

Is that still the plan, or you are tracking to do a different plan?.

Yes, so we were going to continue to invest the time in go-to market and expand out the quota carrying reps and that's the game plan for the second half and also for next year..

Thank you..

Thank you, Mr. Thill. The next question is from Yun Kim with Loop Capital Markets. Please proceed..

Thank you. Kiwi and Michael, congrats on the first earnings call as a public company. Definitely notice a fairly substantial forward-looking statements disclaimer, that paper read, which is exactly what I expected, with all the lawyer background over there. So just following up on Brent's question on the add-on product expansion.

For those customers with multiple products, what is the typical usage mix between those products? Just wondering how much uplift those add-on products provide when a customer adds another product?.

Yes, so for customers who are using both ediscovery and Review and -- well all three, I guess Review and Case Builder. The Review and Case Builder can be 2x to 3x the size of the ediscovery. So it's a multiplier in terms of their total spend..

Great, that's good to hear.

And then just on the gross margin dynamics, can you just talk about what drove that gross margin in the quarter, were there any kind of factors that drove a little bit better than what you thought, or did the worst thing what you thought? And perhaps, I think it's maybe a good time to remind us the drivers behind that dynamics for instance, what the gross margin being impacted if you have a lot of new customer ads in the quarter, which would normally imply a lot more data ingestion, or is that more driven by the number of new matters or cases regardless of the number of new customer adds?.

So appreciate the question. So there's a number of different factors that impact the gross margin. And just like our usage -- we're usage based. And so there's inherent variability in cases, ending cases adding people expanding data to cases.

On the margin side have really outsized performance like Q2, clearly there was a lot of data ingested, and that can potentially depress margins a little bit. But on the other hand, you could have a quarter where margins go up, and that just means there's not a lot of new data that's in.

But it really depends on a variety of factors, you can have different types of data affect margins differently in terms of what type of files they are.

So net-net, it's kind of like on the usage base side margins, there may be some variability quarter-to-quarter, which you saw from Q1 to Q2, but net-net over an annualized basis we're comfortable with where we have guided in the past margins, and we expect that that's going to continue in the future..

Okay, great. Thank you so much..

Thank you, Mr. Kim. There are no additional questions waiting at this time. I would now like to pass the conference back over to Kiwi Camara, Co-Founder and CEO, for closing remarks..

Thanks for joining us today. I've never been more optimistic about our business. Our second quarter results clearly demonstrate Disco's potential.

We believe we have a tremendous opportunity to scale out our product led growth engine to add new customers and accelerate the growth of existing customers, while simultaneously strengthening our brand and encouraging customers to adopt not just one of our products but more of our products over time, as well as expanding internationally and growing our product portfolio.

We will continue to aggressively invest behind each of our growth opportunities and are confident we can drive long-term durable growth and redefine how law is practiced. We thank you for your interest in Disco and for joining our Q2 2021 earnings call..

That concludes the CS Disco's second quarter of fiscal year 2021 conference call. Enjoy the rest of your day..