All right. I think we're ready to kick things off. I'm DJ Hines. I'm the senior software analyst here at Canaccord. You probably heard me say it yesterday, but this is the 46th year that we've done this conference. We couldn't do it without the support of the corporates who come and bring all the great content and the investors who come and ask the smart questions. So thank you guys for being here.

We've got a beautiful day in Boston.

We've got the kickoff show, the conference. Delighted to have the CS Disco team here. We have CEO Edric Fredrickson, CFO Aaron Barfoot. We're going to do this as a fireside chat. Happy to take questions from the group. I have plenty that will get us through a half hour. But maybe just to kick things off, Eric, if you could give us a quick intro to Disco, the problems you solve. And then maybe as part of that, you've been here a little over two years now. Talk about some of the changes you've affected in the organization and kind of what you're seeing as an output of that.

Yeah, you bet, DJ. Hello, everyone. Eric Friedrichsen, CEO of Disco. Disco's in the legal software industry. We've been in business since 2013, went public in 2021, really serving a specific sub-segment of lawyers called litigators and helping them historically with their problems related to e-discovery. So when you think of, I don't know if any of you have seen the Julia Roberts movie, Erin Brockovich, where she's digging through boxes and boxes of paper looking for evidence. We do that, but we do it electronically. And that business has historically, over many, many decades, been a human-based business. And over our history, we converted that into more of an electronic-based business. And so the software was built to be extremely friendly for lawyers and administrators that leveraged the system, which was a game changer for the industry. Previous competitors were powerful but extremely difficult to use. And so that was kind of how the business got started. The business grew very, very quickly on the back of selling to both law firms and corporations and went public in 2021. And then the business started to slow down pretty significantly. I think we were founder-led by a brilliant founder who was a litigator and understood the business extremely well or understood law extremely well and what litigators needed. But we were trying to do too many things all at the same time. So I came in in 2024, in April of 2024, as the new CEO, had an extensive background in growing and turning around companies. My last company was Inverse, which we doubled in size to almost $300 million in revenue and very profitable when I left that business. I was excited to come into Disco. The first step we did was we brought in some great new talent, a.k.a. Aaron is a great example of it. But we brought in a new chief product officer, new chief financial officer, a variety of talent across the executive team and the VP team. We set our strategy and focus to understand our ideal customer profile, which is really large law firms and highly litigious corporations. We changed our go-to-market to be an integrated go-to-market that would allow us to really work on expanding our wallet share within these existing customers. We had many of these customers that might have spent $100,000 or a million dollars per year with us, but we only had 10 or 15 percent of their wallet at the time. And so, you know, we put a lot of effort in growing those customers and getting larger and more strategic matters onto our platform. And it's been great. I mean, we've had now six quarters in a row of accelerating growth. we've we illustrated 13% growth last quarter after when I joined we had we were at 3% growth and so we're on the right trajectory we're hitting on all cylinders and a lot of it is based on pulling the levers and our go-to-market strategy and we see an optimistic future I've told the street many times I believe this business could be a 20% plus grower based on just the core strategy that were executed upon right now and beyond that we just also introduced our unified litigation solution which is the the entire next next phase of disco which we think has a ton of upside a lot of value for our customers and for for disco as well yeah that's

a perfect uh primer on the business and all the changes lots to talk about in that maybe just dialing in on kind of recent execution you reported q2 results uh last week i guess it was weeks are blending together yeah i know yeah um maybe just talk about kind of what stood out to you specifically in q2 uh and kind of what's top of mind as we head in the back half here yeah You know, I think that the real story of Q2, honestly, was a strong execution on the back of focus.

The fact that we really, you know, we put in a new comp plan. We allocated accounts the right way. There's a number of different levers that we pulled over the last several quarters that are all starting to come together. And so that was sort of in aggregate. It wasn't so much that we beat our guidance. It was how we beat our guidance that allows me to have confidence that this can be repeatable. That was the main thing. There were also some real sweet spots on a couple of new levers that we pulled. So at the beginning of the year, we introduced Disco Platform Pricing, which was an entirely new approach to pricing, which has come out of the gates extremely strong. We hit our goals for Disco Platform Pricing rollout within six months for a full year. So obviously, we're looking now to go way past that, but really good strength there. And then in our auto-review product, which is a generative AI product that allows all of that work looking through papers to be done with Gen AI. And that really had a great, great quarter. So those were some of the big highlights.

Let's dig deeper on a couple of those. Let's talk a little bit about Disco Platform and some of the pricing changes that you've affected. Maybe kind of what was the friction point under the old pricing model, and what did you change that now kind of makes it a little bit easier?

So, you know, it's interesting. When Disco was created, it was created on the back of absolute best software, best technology. But also, there was a theory that if the company priced the product differently, it would be a differentiator. And I think for a long time, it was. I think that Disco won some business based on the back of this unique approach to pricing. But by the time I came into the business, I would go into customer meetings, and I would hear about these large strategic matters that could generate a ton of revenue for Disco. that the customers would go with our competitor because they just couldn't explain our pricing. They couldn't explain the pricing to the various decision makers. Essentially our biggest competitor is a company called Relativity, older technology but they've been in the business for a long time, they've got good market share. They price theirs based on the amount of data that comes into the system and as that data grows they charge as that data grows per gigabyte. Well the approach that we had at Disco was, however much data comes in at the beginning, that's how much we charge you for. So it's a more predictable model, but as you can imagine, in order to have good margins, our price had to be significantly more. In some cases, twice as much. And so to somebody that really understood our pricing, they would say, okay, you guys are about the same price, that's fine. But oftentimes, our champions within these law firm customers are needing to sell our products with our pricing to somebody else. Think of them as a channel. And it was just getting too complicated. We were swimming too upstream. So we rebuilt out our pricing model to be in a very similar method to our competitors. Now, obviously, in addition to that, we add more value. We include our generative AI capabilities as part of that core product. So now we look more similar. Maybe we're a little bit more expensive, but we add a lot more value. So that's opened up an incredible number of doors for us. And AI adoption is huge for us as well, because as customers use our AI capabilities to do much more than just creating a production for the defense or for the other side of the case, you know, now they can do many more strategic things.

You talk about embedding AI into the Disco platform. Maybe just give us some examples of what your AI products do for customers. Bring it to life.

Yeah, for sure. So I think the first thing to look at is when I talk about e-discovery, one of the great things about e-discovery for us is that it's mandated. You have to do it. So there's always budget. You're not trying to go convince a customer that they need to go spend money on this. Everybody has to do it. Everybody has to defend themselves. And there is a requirement that you have to produce evidence to the other side. And so there's literally physically a process that you have to go through. And some of these processes last years and cost millions and millions of dollars to go through. What our Gen AI capabilities do on top of that is they take that required process and they can make it much more strategic. So now a lawyer can actually interrogate all of the data and the facts within their cases to better understand what's more important. In fact, even our corporate clients can look at a case before it goes to court and say, man, how risky is this? Should I maybe settle? Where are the hot documents? Where are my danger points? And then when the law firm gets it, it allows them to much more quickly go through the process and start to build a strategy for how they might be able to win the case. So it's really a big game changer. And then our auto-review capabilities, that's a whole other thing. So auto-review is you literally have to go through every single document and tag which ones you will deliver to the other side and which ones you will not. that process could take for a relatively large matter you know six months for 20 attorneys yeah and we could do it in 48 hours uh and the efficacy rates are higher than than what it what it is for humans proven time to time again yeah um maybe we could talk a little bit about auto review i mean it was the other kind of bright spot we called out in q2 like what what clicked in q2 do you think that kind of drove that upside and then aaron i'd be curious well maybe i'll answer that now i can Yeah, well, I think the clicking part was, it's a combination.

I think there's time, there's awareness, but also, I think our GTM teams have been, the go to market teams have been working with customers to make sure they understand the value proposition. Why is this better? How is it faster? And I think that's a process. Lawyers are risk averse by nature. And so in Q1, we had customers coming to us looking for auto review. They were attracted to kind of the capabilities, but they were still early. They were still trying to understand where it was, and I think our sales teams have been working with them, helping them feel more and more comfortable. And then as we got to Q2, we started seeing some of that pay off. We started seeing, hey, instead of it actually coming in as an auto review and customers going the old way, which is a managed review, which we did for them as well, this time they started choosing the auto review. And so that's the great thing is that I think it was the demand is continuing. We're seeing them start to take the leap, I think, with the work the teams are doing. And on top of that, we even saw like repeat buyers. So the good news is we're actually seeing customers come back again for it, which I think is huge. And so it's actually part of the reason we also mentioned we're continuing to invest in that product. And one of the reasons we're investing in Audreview around the tag tuning elements that Eric alluded to there is our goal really is to make that self-service. If you think about that is a massive industry today, right? Where there's third parties all over the world. They just, you know, throw thousands and thousands, millions and millions of documents at, and they go through it. You know, obviously we view one day that auto review is a much better use. And so we think over time it's going to take all of it. And if we can make it self-service, it'll make it a lot easier for people to buy. Yeah, yeah, it makes sense.

Yeah, I mean, just one, another note on that. So, you know, lawyers are conservative. Litigators are another level of conservatism because they can't take risks, right? You can't take a chance of losing a case for your client. And so, in a way, that's a disadvantage to us, but in a way, it's a great advantage to us because the software that we build is very difficult to replicate by others. And the more momentum we get, the momentum picks up on momentum. There was a judge ruling at the end of June, Schulte versus LinkedIn, in that essentially said Gen AI review is the next version of technology assisted review or TAR. And TAR has been mandated for over 10 years as the acceptable way to go through the review process with any discovery. And so another boon to our opportunity there.

It's just the more and more momentum the industry gets and the acceptance that they get when it comes to leveraging technology like ours is helpful yeah um as we think about kind of the the forward trajectory of of auto review is is looking at managed services a good leading indicator or do you think more customers now come in landing with auto review first like help me kind of link what we should expect when we see a good managed review quarter like does that is that a indicator that like hey maybe we'll have a strong auto review in a couple quarters or what's the right way to think about it it's not today too right and for everybody to give context right when you see our revenue you'll see services which services revenue contains professional services and managed review so

those are the two components and you know part of that you know part of that variability comes from professional services which is as eric alluded to part of our strategy has been to attract bigger and bigger matters from our largest customers and part of that involves professional services they need help as they bring these really complex matters to us so that variability will always kind of link to large matters coming in and in the initial phases of it, setting it up. I think the second part of that revenue stream is the managed services business. And it's definitely not necessarily a precursor because I think usually you're choosing an auto review or you're choosing managed services. In the long run, we obviously hope and believe that auto review is going to cannibalize not just this, but all managed review. But I think that's a ways out probably for the all. But obviously today, to us, it's additive. It's straight coming in for both.

Yeah, I think another thing, it's billions of billions of dollars space, the whole review process, almost all human-based historically. And Disco's been in that business for a long time. We've never really hit more than, let's say, about $10 million in revenue from the managed review space. $10 million in revenue is a drop in the bucket. It's like nothing, right? Part of the issue that we had is it was difficult to differentiate ourselves. Of course, if we have a relationship with a client and they're using us for our software, then they would be more likely to use us for managed review. Auto review gives us a much bigger differentiator now. We can deliver with better efficacy at a lot higher pace, a lot higher speed, keep the context in-house rather than the law firms having to send it to legal service providers, which creates new revenue streams for them. And so, you know, we think that we're seeing it in the data that our pipeline of review is going up significantly and the conversion rates are better because we're so much more differentiated. So, you know, we think this is really the unlock for this for us to take a much, much larger share of that wallet.

Yeah. Yeah. Makes sense. I want to talk about the unified litigation suite. I mean, it was a kind of a new product introduction vision for where the company is headed. Before we go there, I want to ask about competition. It's a question I get a ton, and I think one feeds into the next conversation, which is why I set it up that way. But we're getting asked a lot these days around, you know, Anthropic and what they're doing in law. And obviously, there's the legal-specific AI companies, Harvey and Legora, private but big companies. Where are those folks focused versus where Disco is focused? And kind of what creates your moat that leaves you comfortable? Those Venn diagrams aren't going to overlap more over time.

Sure. Clearly, our competition is relativity, it's relativity resellers, and it's Everlaw. Those are by far our biggest competitors, and it's heavily weighted towards relativity resellers, really. You certainly hear a lot about companies like Harvey and Lagora because they're getting a lot of investment right now, and frankly, for good reason, because they're delivering a lot of value. But most of the value that they're delivering is really on the transactional side of law, on the M&A side of law. we are very much focused on litigation and as i mentioned earlier the bar is much higher for litigators what they uh what they need from us they need security they need scalability they need privilege their there's their their requirements are extremely high and that's where we're focused and we have deep uh deep expertise there that would it's very difficult for those types of organizations to go get yep so as you now talking about the unified litigation solution as you work on building that out?

Maybe, A, talk about kind of what is involved in that and how you're able to do it, right? And then second, how does that further kind of cement the moat that you're building?

So the unified litigation solution we just announced at our last earnings call last week is we're really excited. I mean, this is obviously initially we're going into pilot with some new capabilities. Ultimately, this will become disco. We believe that we're in a great position to be able to solve many more phases of the litigation lifecycle essentially from the very beginning of a case to the very end of a case and today we're we're in the chunk of it we're in 50 of the spend there in e-discovery but we think we've got the opportunity to take over 100 of the life cycle for litigation and we're a unique position to do so so first of all we've got the facts with e-discovery which is absolutely critical to any case we also have a very powerful full license to the law to case law and whenever a lawyer wants to try to win a case they need to know what are the claims that have been made by the other party they need to know what are the facts of the case and then what is the case law and they combine those two and allows them to go build their case strategy and everything is driven off of that so about three years ago a little less than three years ago disco signed an agreement with vlex and fast case to buy access to primary law it is a very rare asset that only a few companies have quality access to primary law we've we've got a great license that allows us to you know continue to get updates and also to take the data that we have and allow it to train our models so that it gets better and better and better over time which again very very few organizations have the ability to do and so We think we're in a really unique spot to be able to help our customers drive case strategy, navigate their entire litigation lifecycle, and it would be very difficult for our competitors to touch that.

How do you think about timelines and when this could be commercially relevant to the business model?

The great news is we're moving fast. We're in pilot right now. We've got several customers that are with live matters that are using our initial capabilities with the unified litigation solution. We're building up those proof points. We, you know, Aaron was really clear in the earnings call not to model any revenue for 2026, but we're building up the proof points and we're continuing to learn in the process. And we think this is an enormous revenue opportunity for us. Yeah, yeah.

I want to zoom out and talk about wallet share a little bit, right? Because I think it's an important part of the story. You know, you have customers are spending a lot of money with you. You have million-dollar-plus customers, but even in those, you're getting, what, I don't know, 15%, 25% of their wallet share, somewhere in that range. What's the gating factor or the unlock to kind of get access to the rest of that potential spend?

Yeah, it's true. I mean, we just announced we continue to grow. We put a lot of focus on our largest customers and growing wallet share, and I think we hit 354 customers that each spend more than $100K with us last quarter, so significantly up over the last couple of years. It represents about 77%. We had 15% growth in that segment. So we're putting a lot of focus on these big customers, knowing that they have a tremendous amount of upside. So historically, you know, Disco was really good at, well, Disco had a strategy of landing and expanding. It was really good at landing, but just didn't put enough focus on expanding. So the last couple of years, we've put a lot of focus on expanding, and it's about building the right relationships with the customers. It's about thinking of the law firms as our channel partner, because that's really what they are. Ultimately, it's their end corporate clients that need our capabilities, and doing a better job to equip them with the right content, with the right talk tracks, with the right price model, as we spoke about before, to be able to promote disco. And then larger matters. We've had tremendous progress on getting larger and more strategic matters into disco. That's important for a variety of reasons. First of all, it's better relationships with the customers when you're working with them on their most important stuff. But they're also more revenue for us because we charge based on the amount of data that comes into the system. And so the approach there really was twofold. One was, let's go after the right matter types. We recognized what we did call an ideal matter profile analysis. Just like you have an ideal customer profile analysis, we also did an ideal matter profile analysis. And we recognize that there's certain matter types where we're really good. We deliver a tremendous amount of value, but they're small. Things like employment litigation matters. There's other ones where we're really good, but they're big. Construction litigation, SEC investigations, IP, patent litigation, things like that. We're very, very strong there. They tend to be much, much bigger. And so we pivot our go-to-market to make sure that we are going after the right types of practices and that we are telling them the right story, that the salespeople are demoing the product in a way that really outlines our capabilities in that area. So that was the first thing. The second thing we did is make sure that these customers know that we have services to augment their projects. And so that was something that held us back. So when I started meeting with customers when I joined Disco two and a half years ago almost now, I found when I would say, man, you're great, you're spending a million dollars with us and we really appreciate everything you're doing, but why aren't you putting your large matters on disco oftentimes i would hear things like well we love disco the products are phenomenal but sometimes i just need help i have a small team and i just need help yeah they didn't know that we had that help available to them that we had that professional services and so we've done a better job at marketing our professional services as they integrate with the software we're not trying to go drive up our professional services revenue it's sky high numbers but we win larger matters when customers get a little bit of help along the way yep yeah makes sense um aaron maybe we could bridge some of this to the numbers um so

we've you alluded to growths accelerated for several quarters in a row now um there's a lot going on from a product perspective where you're investing but you also have this q4 ebitda break-even milestone out there um so talk about kind of the levers to get you there and how you think about the sustainability of profitability from here yeah so we've definitely put the goal post out there of being adjusted but positive in Q4, something we reaffirmed in our latest guidance, and I think it's something we've been working for actually for years.

I mean, long before I got here, but I think as Eric arrived, one of the things the company had to do obviously was re-accelerate the growth, and so we've been in this mode for time now, right, of how do you keep accelerating on a bigger base while becoming more profitable, and that's something we've, you know, if you look Q2 last year, we grew 6%, we grew 13% in this last quarter so while accelerating and so I think in our mind you know our if you were to think about how do we prioritize number one for sure let's keep growing can we keep accelerating the growth and so when we look at something like the unified litigation solution that's obviously something that gives us the ability to continue to look at how can we grow faster so we're going to make those types of investments at the same time I think it's great like the AI tooling and you know the ability to actually use it in a productive way where our teams we've really seen the teams come a long way in what we can do. And so I think we can do a lot more today with a lot less than we used to. And so we have the ability to make these investments while becoming more efficient, which is something we've been doing, like I said, for the last two years. And so I don't think it's a new thing to us, but I think we're actually able to get more leverage today than we used to get.

Yeah. And then Eric, you talked about, you see a path to 20% growth for the business. Is that executing on the strategy as is and we can get to 20%? Or do we need things like unified litigation to kick in and auto review to crank up? How do you think about the sequencing of what has to go right for you to become a 20% grower again?

Yeah, look, I truly believe this business can be 20% plus grower on the back of the core strategy we've been executing upon the last few quarters. The unified litigation solution is on top of that. I think there's an opportunity to accelerate far beyond 20% growth once we get the ball rolling there. But in terms of pulling the levers, growing wallet share within our existing customers, getting those larger matters onto the platform, and auto review does factor in, that's what's going to get us to 20% plus growth. And, you know, we're on that trajectory.

Yeah, good. I see we're at time, maybe just a final closing, like, what do you want investors to leave here with? What's the message?

Yeah, look, I think, you know, you hear stories about the Harveys and the Lagoras of the world getting all this investment. And, you know, I think we've got much more opportunity than any of them do, right? You know, we're in a little bit of a different situation because we're in the public markets already and you know but we have real revenue we are accelerating growth there you know we've got a unique opportunity with the unified litigation solution that will be very difficult for our competitors to be able to reach you hear some of them you know the the we don't ever compete with Harvey and LaGuardia today but you do hear them talking about well we want to try to get access to the facts or we want to try to get access to the law people don't want to give them that access and they're signing partnerships there was a partnership that that harvey um sorry let me get my data right yeah harvey signed with lexus nexus and the lexus nexus ceo was interviewed a couple of weeks ago and said we give them less than one percent of our our primary law data they don't they don't want to give the data up it's it's extremely rare to have that so we're in a really fortunate position to be able to have unique assets we've got you know excellent software but we've got excellent people too in the litigation workflows lawyers who have become product people and engineers who have become legal people to combine that into a really big opportunity for us so look we're excited i mean i think uh i would just say keep your eyes on us because we you know go out of our way to say what we're going to go do and then deliver on it and that's what we've been doing for the last few quarters so yeah that's perfect and i'll just layer in pretty attractive valuation in vertical sass for a business that's showing accelerating growth so um this is a great uh coverage of the business and uh i appreciate you guys being here

thank you thanks jay