CS Disco, Inc. is a legal tech company aiming to revolutionize the legal services industry with its cloud-based technology suite, supported by AI. Disco went public in July 2021, initially showing promise with strong quarters but subsequently disappointing investors.
The company has faced significant challenges, including the loss of large deals, leading to a substantial impact on revenue growth. This miscommunication resulted in a shareholder litigation against the company, which is still ongoing.
Additionally, the abrupt departure of Founder and former CEO Kiwi Camara in September last year added to the company’s turmoil.
In recent quarters, Disco has focused on stabilizing its business by re-engineering its sales team, nurturing its corporate culture, and searching for a new CEO. On April 10th, Disco announced the appointment of a new CEO, which could restore investor confidence.
However, recent Q1 2024 results did not reflect this optimism. Given the current valuation, Disco remains a “show me” story, prompting a cautious stance.
Q1 Earnings: Not Much to Get Excited About
Disco reported revenues of $35.6 million for Q1 2024, matching the midpoint of its guidance. Although this represented an 8% year-over-year growth, it showed stagnation compared to Q4 2023, which posted revenues of $35.7 million. The guidance for Q2, set at $35.5 million, suggests a plateau:
Despite the new AI-based product line and the new CEO, it’s prudent to wait for tangible improvements in the income statement. The stagnation in revenues and constant customer count of 1,442 indicates challenges in acquiring new customers, although existing ones remain loyal.
Interim CEO and incoming Chair of the Board, Scott Hill, emphasized the modest churn and stable customer base during the Q1 earnings call.
Profitability Metrics and Challenges
Disco’s bottom line remains negative, with an adjusted EBITDA margin of -14.6% in Q1, a significant deterioration from the previous quarter. The company has increased investments in sales and marketing to address past issues but faces pressure to demonstrate revenue growth soon.
Management expects improvements in the second half of the year but has lowered the annual revenue guidance midpoint by $2 million to $147 million, signaling caution.
Positive Signs: New CEO and AI Innovations
Two factors could support a potential turnaround for Disco. First, the appointment of Eric Friedrichsen as the new CEO brings a proven track record of scaling businesses at SAP and Adobe. His expertise could help restore investor confidence and drive growth.
Second, Disco’s AI-powered product, Cecilia, offers significant potential. Cecilia enables natural language queries and provides answers based on Disco’s private eDiscovery library, with citations supporting the evidence.
Although not a significant revenue contributor yet, Cecilia’s capabilities, such as the newly announced doc summaries feature, could distinguish Disco in the competitive e-discovery space.
Valuation Considerations
Trading at a market cap of $352 million with expected 2024 revenues of $147 million, Disco’s shares have a forward P/S ratio of 2.2, compared to the S&P 500’s forward P/S ratio of 2.8. The recent decline in share price since the Q1 earnings report has brought Disco closer to valuation levels that could support the share price.
However, until there is evidence of revenue growth and improved profitability, calling the bottom remains premature.
Conclusion
Disco shows promising signs of stabilizing after a period of disruption. Investors may consider adopting a wait-and-see approach, looking for concrete evidence of a revenue growth turnaround. Until then, the share price may continue its gradual descent.
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I’m Jackson Hartwell, a writer who specializes in dissecting current business events. I’m dedicated to providing you with clear and concise insights into the world of politics, making it easier to understand the latest news and developments.
