10-Q: CS Disco Reports Mixed Q2: Revenue Up, Losses Persist

CS Disco, Inc. reported a 6% increase in Q2 revenue to $38.1 million, alongside a stable net loss, while Adjusted EBITDA improved significantly.

Summary

• Revenue for the three months ended June 30, 2025, increased by 6% to $38.1 million, up from $36.0 million in the same period of 2024.
• For the six months ended June 30, 2025, total revenue grew by 4% to $74.8 million, compared to $71.6 million in the prior year period.
• Software product offerings revenue increased by 12% to $32.7 million in Q2 2025 and 8% to $63.6 million for the six-month period.
• Services product offerings revenue decreased by 20% to $5.4 million in Q2 2025 and 10% to $11.1 million for the six-month period.
• Net loss attributable to common stockholders was $(10.8) million for Q2 2025, consistent with Q2 2024, but increased to $(22.2) million for the six months ended June 30, 2025, from $(21.4) million in the prior year period.
• Adjusted EBITDA improved to $(2.7) million in Q2 2025 from $(4.7) million in Q2 2024, and to $(7.8) million for the six months ended June 30, 2025, from $(9.9) million in the prior year period.
• Cash and cash equivalents decreased to $21.7 million as of June 30, 2025, from $52.8 million as of December 31, 2024, while short-term investments increased to $92.8 million from $76.4 million.
• Net cash used in operating activities increased to $(14.7) million for the six months ended June 30, 2025, from $(8.0) million in the prior year period.
• The company recorded a non-cash impairment charge of $15.2 million in FY2024 related to a primary law intangible asset and associated capitalized software development costs.

Sentiment

Score: 5

Explanation: The company presents mixed results. While Adjusted EBITDA shows improved operational efficiency and software revenue is growing, overall revenue growth is slowing, and net losses persist and increased for the six-month period. The ongoing securities litigation and the potential need for future capital raises introduce elements of uncertainty.

Positives

• Adjusted EBITDA improved significantly, reducing the loss from $(4.7) million to $(2.7) million in Q2 2025 and from $(9.9) million to $(7.8) million for the six-month period, indicating enhanced operational efficiency.
• Software product offerings revenue demonstrated strong growth, increasing by 12% in Q2 2025 and 8% for the six-month period, driven by increased usage.
• Gross profit increased by 6.4% in Q2 2025, and gross margin slightly improved to 75% from 74% in the same quarter last year.
• Sales and marketing expenses decreased by 2% in Q2 2025 and 5% for the six-month period, reflecting cost management efforts, partly due to decreased headcount and marketing expenses.

Negatives

• Overall revenue growth rate is slowing, with Q2 2025 growth at 6% and six-month growth at 4%, compared to prior periods.
• Services product offerings revenue experienced a significant decline, decreasing by 20% in Q2 2025 and 10% for the six-month period, primarily due to reduced managed review activity.
• Net loss increased for the six months ended June 30, 2025, to $(22.2) million from $(21.4) million in the comparable prior year period.
• Net cash used in operating activities increased substantially to $(14.7) million for the six months ended June 30, 2025, from $(8.0) million in the prior year period.
• The company's cash and cash equivalents balance decreased by $31.1 million from December 31, 2024, though this was partially offset by an increase in short-term investments.

Risks

• Information technology systems or data, including personal and sensitive information, or those of third parties, could be compromised, leading to costs, revenue loss, liabilities, and reputational harm.
• Substantial historical growth may not be indicative of future growth, making future prospects difficult to evaluate and increasing the risk of unsuccessful outcomes.
• Limited operating history and a history of operating losses make it challenging to assess current business and future prospects, increasing investment risks.
• Business depends on customers increasing product usage; any loss or decline in usage could harm the business.
• Substantially all revenue is usage-based, making financial results susceptible to fluctuations based on the timing, duration, and scope of legal matters.
• Reliance on third-party cloud-based infrastructure providers (e.g., AWS) means any disruption, capacity limitation, or interference could adversely affect business.
• Financial results are expected to fluctuate, making quarterly comparisons potentially not meaningful due to the unpredictable nature of legal casework.
• Inaccurate revenue forecasting or expenditure management, or failure to meet publicly announced guidance, could adversely affect operating results and stock price.
• Success of strategic relationships with law firms and other legal services providers is crucial for revenue growth; inability to maintain these relationships could be detrimental.
• Participation in competitive markets means ineffective competition could harm the business.
• The pricing model presents challenges, and the company's limited history with it may hinder accurate prediction of optimal pricing for customer attraction and retention.
• Inability to improve and sustain corporate culture as the company grows could harm success and competitive position.
• Reliance on highly skilled personnel, including management and key employees, means the loss of such individuals could harm the business.
• Current international operations and planned further geographic expansion create various operational challenges.
• Unfavorable global economic conditions, including recession or inflation, could reduce legal spending and harm the business.
• Potential future legal proceedings and litigation, including intellectual property disputes, are costly and could lead to significant liability and increased operating costs.
• Operating in a highly regulated industry means non-compliance with federal, state, local, and foreign laws could force operational changes or harm the business.
• Insiders have substantial control, influencing corporate matters and potentially affecting the common stock market price.
• Elements of product offerings use open source software, which may restrict functionality or require source code release, leading to unanticipated conditions or costs.
• The use of artificial intelligence in products and operations may result in operational challenges, legal liability, reputational concerns, and competitive risks, including flawed or biased outputs and data leakage.
• Failure to protect proprietary technology and intellectual property rights could substantially harm business and operating results.
• Exposure to substantial liability for intellectual property infringement, data protection, and other losses due to provisions in various agreements.
• Inability to timely raise capital in the future, or unavailability of capital on acceptable terms, could limit investment in growth opportunities.
• Future acquisitions, strategic investments, partnerships, or alliances could be difficult to identify and integrate, divert management attention, disrupt business, and dilute stockholder value.
• Fluctuations in currency exchange rates could adversely affect operating results, particularly with international expansion.
• International trade policies, including tariffs, sanctions, and trade barriers, may adversely affect business.
• Ability to use net operating losses to offset future taxable income may be limited.
• International operations may subject the company to potential adverse tax consequences.
• Requirement to collect sales or other related taxes in jurisdictions where it has not historically done so could harm business.
• Changes in effective tax rate or tax liability may harm business.
• Financial results may be adversely affected by changes in accounting principles.
• Incorrect estimates or judgments relating to critical accounting policies could adversely affect results of operations.
• Management team has limited experience managing a public company, potentially diverting attention from day-to-day business.
• Failure to maintain effective internal control over financial reporting could impair ability to produce timely and accurate financial statements.
• Inability to successfully manage business growth due to failure to improve internal systems, processes, and controls.
• Reduced reporting and disclosure requirements as an emerging growth company may make common stock less attractive to investors.
• Stock price may be volatile, and the value of common stock may decline.
• Sales of common stock in the public market could cause the market price to decline.
• Securities or industry analysts ceasing coverage or publishing unfavorable research could cause stock price and trading volume to decline.
• No intention to pay dividends for the foreseeable future, meaning return on investment depends on stock price appreciation.
• Anti-takeover provisions in charter documents and Delaware law could make company acquisition more difficult.
• Exclusive forum provisions in the amended and restated certificate of incorporation could limit stockholders' ability to obtain a favorable judicial forum.
• Business and operations could be negatively affected by currently ongoing securities litigation or stockholder activism.

Future Outlook

The company anticipates continued investment in its technology infrastructure, sales and marketing, product development (including AI innovation like the Cecilia chatbot), services and support, international expansion (particularly in the UK and India), and strategic acquisitions or investments. It aims to increase customer usage, attract new customers, and expand its offering portfolio to address more areas of legal work, centralizing legal data on its platform.

Management Comments

• We believe that the growth and future success of our business depends on many factors.
• We intend to continue combining our deep legal domain expertise and commitment to world-class software engineering to continue delivering features and introducing new product offerings to address more areas of legal work, such as our ediscovery chatbot, Cecilia.
• We believe we have a significant opportunity to continue to grow our customer base, particularly those customers with significant annual ediscovery spend, large practice teams, and practices in legal areas with significant ediscovery needs.
• We intend to continue to enhance our sales force headcount in strategic locations across the United States and globally.
• We intend to cultivate and leverage channel partners to grow our market presence, enhance the virality of our product offerings and drive greater sales efficiency.
• We intend to leverage our technology to introduce further offerings that increase lawyer productivity across more and more areas of legal work over time.
• We intend to continue to selectively pursue acquisitions and strategic investments that we believe can expand the functionality and value of our product offerings and bring talent to our company.

Industry Context

The company operates in a highly fragmented, competitive, and rapidly evolving legal technology market, particularly in e-discovery. It faces competition from large dedicated legal services providers (e.g., Consilio, Epiq), legal services divisions of professional firms (e.g., Deloitte, EY), legacy on-premise software providers (e.g., Nuix, Open Text, Relativity), and cloud software providers (e.g., Everlaw, Reveal Data). The industry is undergoing digital transformation, with increasing demand for integrated, AI-powered platforms. Macroeconomic conditions, such as inflation and interest rates, and global events like the Russia-Ukraine war and Middle East conflict, pose economic uncertainty. Political factors, such as President Trump's executive orders against certain law firms and decreased federal agency enforcement, could also impact the volume of legal matters and, consequently, product usage.

Management Changes

Legal Proceedings

• A purported stockholder class action lawsuit was filed on September 19, 2023, alleging violations under Sections 10(b) and 20(a) of the Exchange Act, claiming materially false or misleading statements about revenue growth between July 21, 2021, and August 11, 2022.
• The lawsuit was transferred to the United States District Court in the Western District of Texas on January 8, 2024.
• The company's motion to dismiss the amended complaint was granted in part and denied in part on January 30, 2025.
• A motion for reconsideration filed by the company on February 27, 2025, was denied on April 9, 2025.

Stakeholder Impact

• Shareholders: Face potential dilution from future equity financings, stock price volatility, and the costs and uncertainties associated with ongoing securities litigation.
• Employees: Benefit from increased headcount in research and development, but the company is reassessing its corporate culture following a former CEO's departure, which could impact employee morale and retention.
• Customers: Experience increased usage of software offerings but decreased usage of services offerings. They rely on the company for high-quality support and may be impacted by any service disruptions or defects. Law firm partners may also be affected by external political factors like executive orders.
• Suppliers/Creditors: The company has significant contractual commitments for cloud platform hosting and software licenses, indicating continued business with these partners.
• Management: Faces challenges in managing slowing revenue growth, persistent losses, and the complexities of ongoing litigation, requiring significant attention and resources.

Next Steps

• Continue to develop and introduce new product offerings, including further innovation of the artificial intelligence system for legal documents (e.g., Cecilia chatbot in Europe).
• Expand sales coverage by enhancing sales force headcount in strategic locations across the United States and globally.
• Extend and strengthen channel partnerships with legal services providers and cloud infrastructure providers to drive awareness and adoption.
• Expand international operations, particularly in the United Kingdom and India, to grow the customer base and employee headcount.
• Selectively pursue strategic acquisitions and investments to expand product functionality, technical capabilities, and service offerings.

Key Dates

Recommendation

The company exhibits a mixed financial performance with slowing revenue growth and continued net losses, despite an improved Adjusted EBITDA. The decline in services revenue is a concern, and the ongoing securities litigation adds a layer of uncertainty. While the company's focus on AI and software growth is positive, the overall financial trajectory and external risks suggest a 'Hold' position for investors, advising them to monitor the company's ability to accelerate growth, achieve profitability, and navigate legal challenges.

Keywords

eDiscovery, Legal Tech, AI, Cloud Software, Legal Services, SaaS, Litigation Support, Corporate Legal, Law Firms, Artificial Intelligence, SEC Filing, 10-Q