CS Disco, Inc. Q3 FY2021 Earnings Call

Thank you for your patience, and welcome to the CS Disco Third Quarter Fiscal Year 2021 Conference Call. Currently, all participants are in listen-only mode, and all lines are muted to minimize background noise. After the speakers' presentations, there will be a question-and-answer session. I will now pass the call to your first speaker, Lee Robinson from CS Disco Investor Relations. Please proceed.

Good afternoon and thank you for joining us on today's conference call to discuss the financial results for Disco's third quarter and fiscal year 2021. With me on today's call are Kiwi Camara, Disco's Co-Founder and Chief Executive Officer; and Michael Lafair, Disco's Chief Financial Officer. During today's call, we will review our financial results for the third quarter of fiscal year 2021 and discuss our guidance for the fourth quarter and full fiscal year 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 fourth quarter and full year of 2021, our market opportunity, market position, product strategy, and growth opportunities. In addition to our prepared remarks, our earnings press release, SEC filings and a replay of today's call can be found on our Investor Relations website at 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 quarterly report on Form 10-Q for the quarter ended June 30, 2021, filed with the SEC on September 3rd, 2021. Additional information will be made available on the company's quarterly report on Form 10-Q for the quarter ended September 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 equivalents is available in our earnings release. And with that, I'd like to turn the call over to Kiwi.

Thanks, Lee. Good afternoon and welcome to our Q3 earnings call. Before I jump in, I want to thank the entire team of Discovians for all their incredible effort, resulting in another stellar quarter. I also want to introduce our new Vice President of Investor Relations, Lee Robinson. Many of you will interact with her in the coming days and weeks and we will make sure there is time for all of you to become friends. With that, let's jump in. On our last earnings call, we spent a good amount of time discussing Disco, our history, and our strategy. For those joining our earnings for the first time, I would like to highlight a few key points. At Disco, we are well-positioned to take advantage of enduring trends in the $767 billion legal services market that is being transformed by software. These trends include the expanding variety of legal work, the ever-rising volume of enterprise data that can become evidence in legal matters, and the growth in regulation that companies are exposed to around the world. We leverage advances in artificial intelligence and cloud computing to build products that automate large categories of legal work, freeing lawyers to focus on those tasks that require human legal judgment. We do this by combining world-class software engineering and design with a deep understanding of the law and how lawyers work and think to create product experiences that feel magical to lawyers. Our first product, Disco ediscovery, helps lawyers quickly find evidence in large collections of millions, tens of millions, or even hundreds of millions of enterprise documents and data. Disco Review leverages Disco AI to automate the process of legal document review, using artificial intelligence models to automatically classify enterprise data into legal categories and identify potential evidence. Disco Case Builder extends this product suite to witness testimony, helping lawyers find evidence in deposition transcripts. Our products all leverage our extensible, scalable platform that uses elastic compute to deliver phenomenal performance even on the largest data sets. By using our products, legal departments save time and money, free lawyers to actually practice law, and most importantly, achieve better legal outcomes. And with that, I'm very pleased to provide a few updates on another strong quarter. We continued our excellent growth trajectory in Q3 with 67% year-on-year growth attributable to broad-based momentum across a large number of customers. We have successfully executed on our plan to add new customers and grow our usage with existing customers. Following our IPO, we've continued to broaden awareness of Disco by attending and speaking at thought leadership sessions at legal industry conferences such as ILTACON, the main conference of the International Legal Technology Association, and General Counsel Conference East and Midwest. In total, our leadership and sales team attended 34 events globally in Q3. In Q3, we continued to see an increasing number of customers use more than one of our solutions. Our ediscovery business has continued to grow and perform well, and we are pleased with the ongoing strength of our Review business, including the expansion of customers who use Review. Thanks to our sales and marketing organizations' efforts, we saw a very impressive sales pipeline in Q3. This momentum contributed to net new client wins in the quarter. Sales performance is driven by a combination of tenured sales reps at Disco seeing strong traction, new reps who have recently joined Disco, as well as proactive inbounds from customers seeking our solutions in the market. We continue to see incredible outcomes for our clients, and I'm constantly in awe at the results our products can deliver. One of our new Disco clients is a leading medical device company. We were introduced to them by an Am Law 200 law firm that has referred more and more of its clients to Disco. This new corporate client adopted multiple products and generated more than $200,000 of revenue in its first quarter with us. This is a great example of how our multiproduct strategy and partnerships with the law firms to drive introductions to new customers are working well. A leading global mobility technology company recently decided to renew and expand its relationship with Disco. This renewal and expansion was driven by the customer's satisfaction with our solutions and the efficiency of using Disco to accelerate legal document Review. This is a great example of the impact automation can have on the productivity and efficiency of legal departments and the tremendous return on investment customers experience by switching to Disco. Disco continues to support some of the most high-profile and mission-critical legal matters. Law firms involved in the front-page drug litigation matter currently use all three of Disco's solutions and recently renewed their Case Builder subscription. We continue to receive positive feedback from clients with special mention of our customer service. We are incredibly focused on customer-centric innovation and have a long history of using customer feedback received through the sales cycle, quarterly business reviews, and industry events to inform our development priorities. Based on feedback from our product advisory council, we developed Disco Early Case Assessment, or ECA. ECA is the process of quickly evaluating large collections of evidence before a full-scale legal document review. A robust ECA platform is especially beneficial for large matters where there are tens to hundreds of millions of documents. With the Disco ECA, customers get access to the full suite of Disco Analytics and Visual Search, including the ability to apply Disco AI models trained in full-scale legal reviews to data in ECA. And likewise, as lawyers identify important documents in ECA, this creates an additional signal that strengthens our Disco AI models. With the Disco ECA, we have extended Disco AI to a larger and richer set of data from our customers, while at the same time making Disco ediscovery and Disco Review even more effective for our customers' largest matters. We are excited to roll out Disco ECA to more customers over the next few quarters and continue to build a full stack of solutions that make our customers' day-to-day work more magical. While delivering continuous future innovation, we also continue to invest in our platform. One of the hallmarks of our products going all the way back to 2013 has been performance. Over the past year, we have improved ingest speed by more than 30%, search speed, and viewer rendering by more than 20%, and production speed by 63%, with 89% of productions completed in less than 30 minutes. For those of us who struggled with poor performance using competing solutions, speeds like this are like going from dial-up to broadband. And as you can see, we continue to invest in getting even faster. We are also proud of the launch of Disco University, an integrative learning program available to Discovians, channel partners, and customers that gives these audiences the ability to deepen their relationship with Disco through continuous learning and certifications. In the roughly one week between the launch and the end of the quarter, we had over 150 individual clients and partners complete over 4,000 courses. We are confident that in the coming quarters and years, Disco University will grow to become a leading resource for legal professionals. Because of the traction we see from all our products with customers across industries, we will continue to ambitiously invest in our go-to-market teams and scale the rest of our operations to meet the needs of our clients. And with that, I'll turn it over to Michael, our CFO.

Thank you, Kiwi. Before I discuss the results and guidance, I'll reiterate a few important aspects of Disco's business model. As we mentioned on our last earnings call, we primarily have a usage-based model that is driven by the number and nature of matters, volume of data, length of time on the platform, and other factors. Our customers appreciate the transparent pricing model and simple contracts that allow them to quickly adopt our solution and easily scale their usage. Now, let's discuss our results and guidance. As Kiwi mentioned, Q3 revenue was $29.9 million, up 67% year-over-year. We had strong performance with growth coming from new customer wins and the expansion of existing customers across all of our products, covering a broad spectrum of clients. In discussing the remainder of the income statement, please note that unless otherwise specified, all references to our expenses, operating results, and share count are on a non-GAAP basis. Our total gross margin was 74%, up from 69% in Q3 of the prior year. As a reminder, our gross margins fluctuate from period to period based, for example, on the amount and types of data ingested and managed on our platform. We expect gross margins to continue to be within the band we've historically seen. Sales and marketing expense was $12.9 million or 43% of revenue compared to 40% of revenue in Q3 of the prior year. This represents an increase of over $5.8 million in the quarter year-on-year as we continue to scale our go-to-market organization. Research and development expense was $9.4 million or 31% of revenue compared to 34% of revenue in Q3 of the prior year. This represents an increase of over $3.3 million in the quarter year-on-year as we continue to invest in innovation. General and administrative expense was $7.8 million or 26% of revenue compared to 16% of revenue in Q3 of the prior year. This is driven in part by the associated costs of becoming and operating as a public company. Operating loss was $8 million, representing a margin of negative 27%, compared to negative 20% in Q3 of the prior year. Adjusted EBITDA was negative $7.6 million in Q3, a margin of negative 25%, compared to a margin of negative 18% in the prior year. Overall, our EBITDA decreased due to a combination of investment across all operating expense categories. Net loss was $8.2 million versus $3.7 million in the prior year. Net loss per share was $0.17 versus net loss per share of $0.28 in Q3 of the prior year. Turning to the balance sheet and cash flow statement. We ended Q3 with $258.5 million in cash and cash equivalents. This is inclusive of the IPO proceeds we raised in July of $223.2 million, net of underwriting discounts and commissions. Operating cash flow year-to-date was negative $18.8 million compared to negative $17.7 million a year ago. Now turning to the outlook. For Q4, we are providing revenue guidance in the range of $28.2 million to $28.8 million, representing year-over-year growth between 47% and 50%. We are providing adjusted EBITDA guidance in the range of negative $10 million to negative $9 million, representing an adjusted EBITDA margin of negative 33.3% at the midpoint. As I mentioned on our last quarterly call, we do anticipate operational costs to continue to grow in Q4 and next year as we continue to invest in our product, go-to-market team, and G&A. On a full-year basis for fiscal year 2021, we are raising our revenue guidance to $108.7 million to $109.3 million, representing year-over-year growth between 59% and 60%. We expect adjusted EBITDA between negative $21.1 million to negative $20.1 million on a full-year basis. In summary, we are pleased with the trajectory in which we are headed and will continue to drive transformation of the legal industry, enabling legal professionals to efficiently provide better outcomes for their clients. We are going after a large market and plan on making significant investments across Disco in 2022 to ensure we can efficiently keep pace with our growth as we scale. I'd like to now turn the call over to the operator to open up the line for Q&A.

Your first question comes from Sterling Auty from JPMorgan. Your line is open.

Yes, thanks. Hi, guys. So, one question and one follow-up. And these are two popular ones that I've gotten from investors, so I think it's helpful just to level set people. Can you give us a sense, when you look at the percentage of users or when you look at the user base in total, what percentage of those that are on the platform are actually sitting in corporate legal departments versus the outside law firms that they're actually using?

Sure. So, all of the spend for Disco obviously comes from the legal department budget of litigants, generally large corporations. In terms of users, it depends on the corporation's kind of in-sourcing versus outsourcing strategy. So, a typical approach would be that the corporate has a couple of in-house counsel and maybe an internal sort of paralegal-style team that does the initial assessment of corporate data that may be relevant to a new legal matter like an investigation or a lawsuit. For example, if there is an internal whistleblower complaint, the users may be entirely internal to the corporate legal department where they'll use our platform to collect enterprise data, do their investigation, and then decide whether or not they need to take action. Similarly, in the litigation context, internal users in the legal department might conduct that initial review and then decide that it's appropriate to negotiate a settlement, so that the case never actually winds up in court. Now, if a legal matter progresses beyond that point, most corporate legal departments will engage outside counsel at a law firm to represent them in the legal matter, and once that happens, the preponderance of the users shifts from the legal department to lawyers at outside counsel. And these are often large teams of lawyers who are conducting a legal document review, providing advice to the client, and ultimately, taking other action like filing lawsuits or filing motions, taking depositions, doing all the other kinds of things that happen in big legal disputes. So, the exact split of users varies company-by-company based on how much the company in-sources relative to using law firms and it also shifts over the lifetime of a legal matter.

That makes sense. A good follow-up question is, when considering decisions about ediscovery solutions, what percentage of these decisions is made solely by corporate legal departments versus those that are influenced, either partially or heavily, by outside legal firms? Investors want to understand the role of outside legal firms in the decision-making process regarding ediscovery tools.

So, each customer falls somewhere on a spectrum from entirely in-housing the decision about ediscovery to entirely outsourcing it to the law firms they work with. At a high level, Sterling, a good way to think about it is roughly 50-50. 50% of the time, the principal decision-maker will be someone sitting in the legal department. 50% of the time, the principal decision-maker will be someone sitting at the law firm. But when I say principal decision-maker, I don't mean sole decision-maker, right? Generally, there's a consultation process. There are many stakeholders involved in each of these sales. So, if you think of a typical large corporate legal department, maybe they frequently use four or five different law firms to represent them. And they may also have sold risk to a variety of insurers who will weigh in, in connection with their ediscovery decisions. So, that's kind of a network of decision-makers who all work together. Now, this is why when we've talked in the past about the importance of our partnership strategy with law firms, that's why that strategy is both so important and so effective, right? If you're a lawyer at a law firm, you represent multiple clients, some of those clients will be using Disco and some of them will be using one of our competitors. The lawyer at the law firm gets to have both experiences, and our belief is that very frequently, those layers develop a strong preference for Disco. So, what happens then is that they go to their other corporate clients and either influence the decision or if the decision is outsourced to them, they simply make the decision to switch to Disco, and that's how we spread from corporate to law firm to corporate to law firm.

Understood, that's very clear. Thank you, Kiwi.

Thanks, Sterling.

And your next question comes from Koji Ikeda from Bank of America. Your line is open.

Hey, guys. Thanks for taking my question. Really nice quarter here. Just a couple from me. So, looking at the fourth quarter guidance, nearly 50% growth here. So really great growth, but it is down a bit sequentially. However, that sequential decline is less than when we saw in the Q3 guide that you gave during the second quarter results. So, how should we be thinking about that? Is there any large cases that you are anticipating coming off the platform or maybe already have in the fourth quarter or is this just another element of conservatism here?

Thank you for the question, Koji. As a newly public company and this being our second quarterly call, we want to be cautious with our guidance. Q2 showed exceptional performance, and we were thrilled about the 88% growth that quarter, as well as the 67% growth in Q3. We aim to be conservative, which I've mentioned before. Overall, we feel positive about the quarter, the numbers, and the momentum in our business.

Got it, and just one follow-up from me. Regarding net revenue retention, I understand you aren't providing specific figures, but could you give us some directional insights? I remember that in the original IPO perspective, it was 122% for the first quarter. Could you offer some guidance on that?

We're still pleased with that number. It's north of what we published in the S-1. And we're really pleased with where it is.

Got it. Thanks, guys. Thanks for taking my questions. Really appreciate it.

And your next question comes from the line of Tyler Radke from Citi. Your line is open.

Good evening, everyone. Thank you for taking my question. I wanted to gain some clarity on the changes between Q2 and Q3. As mentioned, there was a significant impact from a large customer in Q2. Could you help us understand how much revenue from that large customer decreased sequentially? Additionally, how did you compensate for that loss? Was it mainly through acquiring new customers or expanding with existing ones?

So, the shift is not due to any particular customer as opposed to our business as a whole. If you look at Q2, the way I described that on our last earnings call was a tsunami of goodness. It's literally everything going right that could go right in our business. If you think about every customer at Disco or each of our businesses or each of our geographies, each of them have fluctuations because of the usage-based nature of our business. And what you saw in Q2 was all of those usage-based streams having their positive variance stack up. And so, in some sense, Q2 with 88% growth is an example of how good, good can be when everything in our business goes right. Now, coming off of that amazing quarter, we couldn't expect that all of those fluctuating trends would again stack up magically in Q3, and so we gave you a conservative guidance. But, of course, as Q3 actually turned out, it was another stellar quarter and we beat that guidance by 16%. So, that's how to think about it. There's not a particular customer that's driving ups or downs. It's more appropriate to think that our whole business is usage-based and has these kinds of fluctuations, which informs our guidance philosophy.

Okay, that makes sense. And I know there was quite a few job postings you guys have had on Disco Review and kind of some of the services stuff. I'm just curious how the progress of that organization is going? What you're seeing both from a hiring perspective, given the labor shortages, as well as a demand perspective from customers? Thank you.

Yes, we've had great progress, less so in Services than in Review. Our Review business we've been making big investments in scaling up the leadership team. So, I think it's public now. We added a leader of that team, Umair Muhajir, who joins us from EY Law. And we added a Director, Saida Joseph, who joins us from Morgan Lewis. Those are two examples of really high-caliber folks who we've added as we're scaling out the Review operation. Our services side, as you know, is a much smaller portion of our business, and we've made sort of ordinary hiring there to keep up with our growth, but we're much more focused on the three core lines; ediscovery, Case Builder, and Review.

And your next question comes from Brent Thill from Jefferies. Your line is open.

Hi, this is Luv Sodha filling in for Brent Thill. Congratulations on an impressive quarter. My first question is for Kiwi. Great job this quarter. I wanted to ask about the significant backlog of pending federal cases that we've come across in the data. Does this situation provide an advantage for you? Also, how do you anticipate the sustainability of this backlog as we move into 2022 and 2023?

Yes, I've read this in your report and I certainly can see the thinking behind it. But I can tell you, on the ground, this is not something that we've been talking with customers a lot about. It does make sense that if there is such a backlog, that that backlog could create a tailwind for Disco, but it just hasn't been our experience on the ground. What we hear from customers is much more of the usual, that sort of the timing of legal matters can't really be controlled, and it just is what it is, right? If you think about the usage of our platform, it's driven by when a regulator opens an investigation or when a lawsuit is filed or when a whistleblower complaint comes up. I think earlier in COVID, so the quarter right after COVID hit, there was more of an impact because you literally had courthouses shut down. And that cut both ways, right? It lengthened the kind of usage of our product for matters that began before the shutdown, but it also delayed the addition of new data for matters that were delayed due to the shutdown of the courts. But we're just not seeing that as much right now.

Got it. Great. And maybe a quick follow-up. You mentioned some great hiring on the go-to-market side. I guess, could you talk to us a little bit about how you are tracking relative to your goals? I know during the IPO process, you were talking about 10 reps a month. Is that still a good benchmark going forward in terms of, you know, your go-to-market investments that you're making?

We're continuing to invest aggressively in go-to-market. And it's not just quota-carrying sales reps, although they're the tip of the spear. It's also the roles that are to the left and right of them. So, we've been increasing our investment in marketing programs, things like digital and field marketing. In my prepared remarks, I talked about the 30-plus events that we attended in Q3, which is a notable change as the world is coming out of COVID. We've also invested in scaling headcount across our SDR team. Those are folks focused on lead generation and scaling headcount across our customer success organization, which is very focused, obviously, on customer success but also on identifying upsell and cross-sell opportunities. So, if we look at what's going on in the business, what I'll tell you is that our pace for investing in go-to-market, both in terms of programs and headcount, is only accelerating. And we expect to continue that, not just through the end of this year but into 2022 and beyond.

And your next question comes from DJ Hynes from Canaccord. Your line is open.

Hey, guys, nice work here and great set of numbers. Kiwi, what are you seeing the legal service providers do to slow the adoption of AI-driven review solutions? I mean, the value prop just seems so obvious to me that I'm curious how they sell against it.

Well, look, I think we're winning. I think the numbers bear that out and so does what we're hearing on the ground. I think what you're seeing is the fact that it's a really large market, right? And so, there is so much room for software-based solutions to grow while these services companies, in some sense, hang on. I think many of the owners and management teams at the services companies are pursuing the sort of consolidation, drive margins kind of a classic private equity style strategy to continue milking the market before this transformation happens. I'm obviously a bit biased, but for my seat, I really haven't seen an effective answer to the underlying trend, which is driving Disco's growth, which is the move away from services to software.

Yes, okay. And then I don't know if this is better for Michael or you, Kiwi, but I want to ask about R&D spend. I mean, we've seen a pretty significant jump, right? It's up more than 50% since Q1 of this year. Any way to put a finer point on kind of where that investment is going? And is it being allocated toward kind of existing product enhancement? Is it being put toward working on new stuff? Just any qualitative color there would be helpful.

It's mainly being directed towards our three existing products: e-discovery, Review, and Case Builder. One key aspect that sets Disco apart is our commitment to investing in the platform as well as its features. In my prepared remarks today, I highlighted innovations in feature functionality, such as Disco ECA, and emphasized the significant investments we're making in our platform. This is reflected in improvements to performance, accuracy, and the capabilities of our AI models. We are continuing to invest heavily in research and development. It's important to note a crucial distinction regarding our R&D spending. In the early stages of tech companies, there are typically two approaches to R&D: one involves developing a product based on hopes of market demand and iterating until achieving product-market fit, while the other, which is what we're doing at Disco, involves creating products for which we already have a substantial waiting list of existing customers eager to pay for these capabilities. Our primary objective for next year is to expand our go-to-market and sales teams, but we will keep investing in R&D because we believe that building great companies fundamentally relies on product development.

Yes, very, very helpful color. Thank you.

And your next question comes from Derrick Wood from Cowen. Your line is open.

All right. Thanks for taking my questions. Congrats on another strong quarter. Kiwi, I wanted to ask what kind of impact you've seen in brand awareness since the IPO? And I know you mentioned attending more events this quarter, but any way to gauge how the IPO, if any, has given you more market awareness or how it may be helping with lead gen or win rates?

The most significant change we've noticed in our business is a surge of inbound RFPs. We receive so many of these requests that it has become challenging for us to respond, which is certainly a positive challenge we'll tackle through hiring. This is the primary change we've observed. Additionally, we are experiencing strong engagement at the field marketing events we attend. Last quarter, I mentioned an increase in our win rates, and we have seen that elevated win rate continue into Q3. This could be attributed to Disco's growth or potentially the boost from the IPO process. Customers seem to be thinking that Disco is a well-funded public company they can collaborate with as they consider their transition to adopting legal technology in the coming years.

Makes sense. And, Michael, one for you on the gross margin side. I mean, we've seen it bump around 73% to 71%, now 74%. Just remind us the mechanics behind what changes those? And then maybe what you're thinking about how to model Q4 and what's kind of baked into your guidance?

Yes. So, Derrick, good question and as I've mentioned before, the margin does move around. It's kind of similar to the fact that we've got this usage-based model and the type of data that's ingested, the mix of the data can potentially impact the margin. I wouldn't read too much into the margins in Q3. It was an awesome quarter. I'll take a 74% blended margin any day of the week. The margins in Q2 were a little bit lower, that was an outsized performance quarter, but still 67% year-over-year growth is also outsized and exceeded our expectations. So, we're really pleased with the 16% beat.

And just any help in terms of directional comments around how to think about Q4?

So, Q4, I really would look at our guidance, both the revenue and the adjusted EBITDA margin. We're not guiding at the gross margin level, but I would say that you should basically look at the historical bands that we've seen over the last couple of quarters, and that's really the guide you should go by.

Got it. Thank you.

And your next question comes from Scott Berg from Needham. Your line is open.

Hi, Kiwi and Michael. Congrats on the great quarter, and thanks for taking my questions. I guess I have two. Kiwi, in your pre-scripted remarks, you talked about seeing customers use more than one product a little bit more. It sounded like Review was the specific module that had a pickup there, but I assume most of your net dollar retention today is still just expanded usage on the ediscovery side of the platform. But as a customer adds those additional products, how should we think about their spend with Disco? If they're adding Review or Case Builder, does the $1 go to another $1 goes to $3, maybe in all three solutions? Or what does that ratio look like? Thank you.

$1 goes to $3. So, this obviously varies a bit customer-by-customer. But if you look at mature customers who are adopting all solutions, their total spend is two to three times their ediscovery only spend. And that's why we're so excited about this multiproduct, right? It creates an enormous tailwind for growth as we go into 2022 and 2023 and continue to drive higher multiproduct attach rates. And it also demonstrates one of the key pieces of leverage in our business, which is, over time, as we add more and more products portfolio, we're able to capture a bigger percentage of the legal budgets of our clients with very little incremental S&M spend, providing a pathway to long-term operating leverage.

Very good. Helpful there. Thank you. And then from a follow-up perspective, I know you talked about one of your legal firm partners referring to a large customer in the quarter that added $200,000 worth of revenue in the quarter. But how should we think about kind of that partner traction overall in terms of the leads or referral business that you're seeing from them today versus maybe six or nine months ago?

Our relationships with law firms are central to our strategy. You may recall that my background involves lawyers at a law firm who were so frustrated with the existing solutions that we created our own. Initially, we had no plans to start a company; we just wanted better tools for ourselves. When we realized there was significant demand, we decided to turn it into a business, which is how Disco came to be. This approach is deeply integrated into our organization. We aim to create product experiences that feel exceptional for lawyers, which is part of our identity. The lawyers at these firms recognize our value and become advocates for us. This relationship works on two levels: they introduce us to their clients in corporate legal departments, and many in-house counsels begin their careers as associates or partners in law firms. Thus, a lawyer familiar with Disco from their time in a law firm often carries that knowledge into their in-house roles and shares it across various companies over time. This network effect, along with our commitment to delighting individual users, is essential to our strategy.

And your next question comes from Parker Lane from Stifel. Your line is open.

Hi, gentlemen. Thanks for taking my question. I wanted to ask about the international opportunity. Kiwi, you just referenced you've had a tidal wave of inbound RFPs. Just wondering how many of those have come from internationally domiciled organizations and how that's informing your investments in either a physical presence or a much stronger go-to-market investments to address these areas in 2022?

I don't have the exact statistic on the percentage of RFPs from internationally headquartered companies right now, but I can share two relevant points. First, these RFPs usually originate from large multinationals, and irrespective of their headquarters, they often involve global legal matters or multiple countries. Sometimes, they focus on specific regions. The second point is that we are experiencing significant momentum outside the United States, with most of this growth coming from local businesses rather than U.S. multinationals. Our London office is not just serving American clients; we also have European-headquartered multinationals and are successfully developing local business. In the coming years, we will increase our international investments and expand into more regions worldwide to capture local business and better serve our existing clients wherever they operate.

Yes, makes a lot of sense. And then thinking about your commentary on ingestion and production speed improvements, how much of that has come from your own internal development efforts versus those of some of the third parties like Amazon Web Services that you're actually building the platform on top of?

Yes. So, look, we think that taking advantage of cloud computing and the network of technologies that folks like Amazon and Elastic have built on top of the cloud is really table stakes for how you should build a modern product, but yet it's not universal than legal, right? It still remains one of our huge differentiators that we didn't forklift a code base written to run on some service provider's kind of server under their desk and just run it in a cloud environment and call it cloud. Instead, we built a cloud-native product that aggressively leverages things that make cloud unique like Elastic Compute. We're a really big user of Amazon Lambda, which lets us rapidly scale out compute to deal with the searches of data. We're able to get fleets of GPUs for very small increments of time, which lets us apply the latest deeply compute-intensive approaches to machine learning and AI. So, those things are sort of core to what we do. And while you would think they would be broadly adopted in legal tech, in our view, they still have not been. Now, on top of that, about half of our R&D budget is dedicated to investing in platform. And you can think of those as the things that Disco has built on top of those cloud-native technologies where even if you did the cloud-native part, you haven't done the Disco proprietary part, and that's all kinds of things throughout their platform. They tell me that I sometimes bore people with their technical details, so I'll spare you. But one example is when you think about any given document, that document will be related to many other documents. For example, it could be an email that's in a conversation with other emails or it might be a document that has similar documents that might be earlier drafts contract that SMD is looking at. It could have dozens of these other kinds of relationships. And one of our big investments was building a system that allows us to update documents even though the document contains all of these other relationships, which might make it basically very expensive to update from a compute and time point of view. That's one example of the kind of technical investment that is perhaps a boring to our customer but translates into things that our customers care deeply about, which are the performance apps that I included in my prepared remarks.

Yes, appreciate all the color and congrats on the quarter.

And that concludes our question-and-answer session. I will turn the call over back to CS Disco's Co-Founder and CEO, Kiwi Camara, for closing remarks.

Thank you for joining us today. I'm very excited about the momentum we are building and our third quarter results are a fantastic representation of this. We have firm belief in our ability to scale our business, attract new customers, and accelerate adoption of our solutions with both new and existing customers. We strive every day to innovate and create a magical experience for our customers. They are our focus. We will continue to aggressively invest behind each of our growth opportunities and are confident that 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 Q3 2021 earnings call.

This concludes today's conference call. Thank you for participating. You may now disconnect.