CS Disco, Inc. (LAW) Q4 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the CS Disco Fourth Quarter and Fiscal Year 2021 Conference Call. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Lee Robinson, 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 fourth quarter and fiscal year 2021. With me on today’s call are Kiwi Camara, Disco’s Founder and Chief Executive Officer and Michael Lafair, Disco’s Chief Financial Officer. During today’s call, we will review our financial results for both the fourth quarter and fiscal year 2021 and discuss our guidance for the first quarter and full fiscal year 2022. 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. 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 first quarter in fiscal year 2022, our market opportunity, market position, product strategy and growth opportunities. 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 outcome of the matters covered by these forward-looking statements is included in our filings with the SEC from time-to-time, including the section titled Risk Factors in the quarterly report on Form 10-Q for the quarter ended September 30, 2021, filed with the SEC on November 10, 2021. Additional information will be made available in our annual report on Form 10-K for the year ended December 31, 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 paired 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 now, I’d like to turn the call over to Kiwi.

Thanks, Lee. Good afternoon and welcome to our fourth quarter and fiscal year 2021 earnings call. This will be Disco’s 10th year in business. I want to begin by thanking the many Discovians past and present, whose hard work, dedication and belief have resulted in so many remarkable achievements over the last 9 years. We would not be here without them. 2021 was a banner year for Disco. In addition to our IPO in July, we continued to innovate in both features and platform across all our products, added many new customers and expanded many of our existing customers and continued to add top talent to our team across every function. Software is coming to legal, and we believe we are well positioned to build a large and enduring business on top of that fundamental transformation. Let me begin with a brief overview of our business for those of you who are new to the Disco story. At Disco, we are going after the $767 billion market for legal services, replacing services with software. Every large company, regardless of industry or vertical, has legal needs and a legal function. But historically, the legal function has been underserved by technology. Our product help the legal function by leveraging artificial intelligence and cloud computing to automate or accelerate large categories of legal work. We seek to automate the parts of the practice of law that don’t require human legal judgment so that lawyers can focus on the kinds of work they went to law school to do. Several key trends are powering the legal functions’ shift from services to software. First is the explosion in the volume and variety of enterprise data that may be relevant in legal matters and the velocity with which that data is created. Legal matters today can involve millions, tens of millions or hundreds of millions of documents, including not just e-mail, presentations and spreadsheets but also chat, video, application data and more. Second is a generational shift among lawyers. The new generation demands highly-performant, easy-to-use, self-service software solutions that combine enterprise-grade functionality, security and reliability with consumer-grade performance and design. Third is the continued growth of regulation around the world and the growing tendency of companies to operate across multiple jurisdictions. The impact of law on business is only growing. These trends are driving growing demand for software-based solutions that run in the cloud, enable remote work and collaboration and leverage AI to automate or accelerate work that was previously done by large teams of humans. Disco is well-suited to take advantage of this opportunity. We combine a commitment to world-class software engineering and design with a deep understanding of the law and how lawyers work and think to build product experiences that feel magical to lawyers. Our usage-based business model makes it easy for new customers to get started on our platform. As end users experience the magic of Disco, they often become evangelists, growing adoption within their organization, expanding to use multiple Disco products and spreading Disco through the highly networked and highly collaborative legal industry. 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. Our second product, Disco Review, leverages Disco AI to automate and accelerate the process of legal document review using artificial intelligence models to classify enterprise data into legal categories and identify potential evidence. And our third product, 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 practice law and, most importantly, achieve better legal outcomes. Now let me turn to our 2021 results. For the first time in company history, we crossed the $100 million revenue mark, achieving $114 million in revenue for fiscal year 2021. This represents growth of 67% year-on-year for the full year and 76% year-on-year in the fourth quarter. Our exceptional growth has several key drivers. First is acceleration in secular trends that’s caught in our favor, for example, growing customer demand for cloud solutions over on-premise, for software-based solutions over traditional professional services and for full stack AI-powered solutions like Disco review that go beyond giving customers tools for legal work and actually guarantee customers the outcomes they care about. These trends have supported strong sales growth across all our products. Second, we have continued to add new customers, growing our total customer count. We finished 2021 with 1,126 customers, an increase of over 300 customers and growth of 36% year-on-year. Third, we continue to move upmarket and land larger customers, and these customers are ramping their adoption of our platform more quickly. In 2021, 214 customers spend more than $100,000 on the Disco platform, an increase of 52% year-on-year. In 2021, all of our top 20 customers spent over $1 million on Disco offerings, a milestone in company history. Fourth, international sales, while still a relatively small part of our revenue, grew 4x year-over-year in 2021. We are excited about the prospect for continued international growth and have invested in scaling up our team in London to pursue this opportunity in 2022 and beyond. We saw tremendous growth across all our products. The strength of our Ediscovery and Review businesses continued with increasing adoption among new and existing customers. Review adoption more than tripled in 2021. Case Builder adoption reached every major customer type we currently serve. And we are seeing more and more customers use more than one Disco product. Over time, our goal is to continue adding products on top of the Disco platform that enable customers to use our platform for more and more kinds of legal work and allow us to earn a growing percentage of our customers’ legal budgets. Here are a few customer stories from 2021. Throughout 2021, we added and expanded our direct corporate client relationships. As an example, a major e-commerce company expanded its enterprise relationship with Disco by adding Disco Review to its existing use of Disco Ediscovery. This company’s use of Disco Review helped streamline the workflows between the client’s internal legal team and outside counsel. By shifting away from law firm-driven review to Disco Review, the client accelerated time to evidence and reduced total legal project cost. These are the benefits of fully adopting Disco’s multi-product platform. This engagement with multiple Disco products led to an increase in matters on the Disco platform, more users at the company as well as subsequent relationships built with several high-profile law firms that represent the company. Second, a mega-cap energy company first became a Disco customer in Q2 2021. By Q4 2021, they have tripled their spend. They are using both Disco Ediscovery and Disco Review and have been thrilled with the results. By using our AI-powered solutions, they reduced their reliance on brute force review by armies of lawyers. They realized substantial savings in terms of time spent by lawyers on legal document review without compromising quality. In one matter, they needed over 44,000 documents reviewed within a week. Using Disco Review, they were able to surface legally important documents with Disco AI and complete their work in 50% of the anticipated review time. Because of results like this, this customer has expressed its desire to migrate even more of its Ediscovery and legal document review program to the Disco platform. Third, we recently signed a 3-year subscription with an Am Law 200 firm that increased its spend on Disco over 45x and grew its number of matters on the Disco platform by 8x in the last year. Law firms like these are wonderful strategic partners for Disco because they are a channel through which our solutions can spread, from legal department to law firm, the legal department and so on, and also through lawyer career mobility as associates or partners of law firms become in-house counsel in legal departments. Fourth, we signed on new legal services provider partners in Q4, including CDS and Complete Legal. These partners act as resellers of our products and have invested in earning Disco certifications and training their sales and delivery teams to sell and support our products. We believe continuing to grow our reseller channel can help accelerate our growth, especially in parts of the market where we do not have full direct sales coverage today and especially given the tremendous size of the legal market we are going after. That sums up a great 2021. Where do we want to go next? Our strategy has five pillars. Pillar number one, be the clear legal software leader by being the best at building software that lawyers love to use. Our central insight when we founded Disco was that software can automate large parts of the practice of law, freeing lawyers to focus on the kinds of work they went to law school to do. We are reimagining how the legal function works with and revise on technology. Because software is so new to legal, capitalizing on this insight requires the capability to build software that lawyers love to use, about which they will become evangelical. This capability is the core of what we do at Disco. By combining a commitment to world-class software engineering and design with a deep understanding of the practice of law and how lawyers work and think, we repeatedly and reliably build product experiences that feel magical to lawyers. We believe our software products are changing customers’ expectations about what legal software can do, how fast it can be, how easy it can be to use and how much it can improve legal outcomes. The customer stories I just mentioned and our tremendous growth in 2021 are just some of the evidence that gives us confidence that we are right, and we are not resting on our laurels when it comes to R&D. We are continuously innovating. Over the last few earnings calls, you’ve heard us talk about major new features like Disco early case assessment or ECA and about improvements and key measures of platform performance. Last quarter, we released Enhanced Communication Search that allows users to more easily find privileged e-mails and Enhanced Search Visualization that allows users to more quickly see and explore patterns in data. We have earned a reputation for delivering products that feel magical to lawyers. Pillar 1 of our strategy is to live up to that reputation with every product we release and every feature we ship. If we continue to do this, we will be acknowledged as the leader in legal software. Pillar number two, Disco as the platform of choice for the general counsel, the largest legal budgets in the world are controlled by the general counsels of large enterprises. For the past several years, our strategy has been to evolve the Disco platform into the platform of choice for these buyers. This means developing an integrated suite of applications on our platform that together bridge the chasm between enterprise data that is exploding in scale and all the legal work for which that data is relevant or required. We started down this path with releases from several years ago. Disco Analytics and Disco AI allowed legal departments to quickly explore data to assess risk and drive early settlements without incurring the costs of a full legal document review. And Disco Review Metrics gave general counsels a new level of transparency into the pace, progress and quality of legal document reviews done by outside counsel. Next came the Disco Data Management Suite and Disco High-Speed Uploader that allowed self-service rapid ingestion of unstructured enterprise data into the Disco platform in a forensically sound manner. Then came Disco Cross-Matter AI form that allowed general counsels to use the legal document review performed on earlier matters to power AI models that can automate or accelerate review on subsequent matters. And last year came Disco early case assessment or ECA that allowed legal departments to collect and explore large quantities of enterprise data to separate out data likely to be relevant to specific legal matters and data not likely to be relevant. Each of these releases has brought software-based automation earlier and earlier in the workflow of the general counsel and the legal department. Simultaneous with our earnings release today, we announced our first acquisition, which represents the next step in our journey of building the platform of choice for general counsels. We acquired legal hold and workflow technology from Congruity 360. These products, which will be called Disco Hold and Disco Request, extend our platform even earlier in the legal process and feed naturally into downstream use of our existing products. Disco Hold lets legal departments implement, track and manage legal holds, including the hold notices and acknowledgments and the preservation of enterprise data in place in systems like Office 365. And Disco Request is a workflow software that lets legal departments manage third-party legal requests such as service of process, subpoenas or law enforcement data access requests. Of the hold solutions on the market today, we were most impressed with this technology for a number of reasons: completeness of capabilities; the rave reviews from existing customers, including around ease of deployment and thoughtfulness of the design; and the incredible customer-centric team who are a great fit for our Disco culture. With this acquisition, we are adding new clients, strategic technology and impressive talent to Disco and making further progress on our second strategic pillar of being the platform of choice for general counsels. Pillar number three, deliver outcomes using technology. When a customer buys Disco Ediscovery, they are buying a wonderful tool for legal document review. Disco Ediscovery leverages elastic compute in the cloud and modern approaches to artificial intelligence to make it possible to automate or greatly accelerate much of the work of legal document review. But Disco Ediscovery is still only a tool. It requires lawyers to use it. With the Disco Review, we went one step further. Instead of just selling the tool for a legal document review, we sell the ultimate outcome, the customers’ documents reviewed. And we use our technology to deliver that outcome far more efficiently and with no sacrifice in quality compared to a law firm or a legal services provider that relies principally on people and process to deliver the desired outcome. This is an example of our third strategic pillar, delivering not only technology tools but also going further to deliver outcomes using technology. We won’t just sell you a hammer, we’ll build you a house. The more than 3x growth in Disco Review adoption we saw last year testifies to the effectiveness of this strategy. We anticipate building offerings similar to Disco Review in other areas of legal work where we can deliver the legal outcomes that customers ultimately want to buy, but do so more efficiently and without sacrificing quality by using technology to automate or greatly accelerate work previously done by large teams of people. This full-stack strategy, delivering both technology and outcomes, clearly differentiates us from many of our competitors. Pillar number four, be the legal tech portfolio owner with an extensible software platform that supports multiple products used on more and more kinds of legal work. Our early and ongoing R&D investments have resulted in a scalable platform that can support and power multiple legal tech applications. Already, we are seeing leverage from that platform in our launch of subsequent products like Disco Case Builder. We expect to see further leverage as we technically integrate the newly acquired Disco Hold and Disco Request products. Platform capabilities, such as our document processing engine that allows for collection and ingest of unstructured enterprise data at scale or our cutting-edge artificial intelligence system that automates the classification of legal data can be applied to accelerate the development of new products and expand the capabilities of acquired products quickly. And our existing more than 1,000 customer relationships and rapidly scaling go-to-market engine can enable us to accelerate revenue growth for these new product offerings built on our platform. Pillar four of our strategy is to use these platform and distribution advantages to quickly expand our product offerings and extend the applicability of our platform to more and more kinds of legal work, allowing us to earn a growing percentage of our customers’ legal budgets. Customers adopting multiple Disco products can spend 2x to 3x their Disco Ediscovery spend. And more and more often, we land new customers with our newer products. We believe our multiproduct strategy can create tremendous tailwinds for both expansion and new logo acquisition for many years to come as software transforms more and more kinds of legal work. Pillar number five, Disco at the center of the legal tech ecosystem. We already have strong longstanding partnerships with hundreds of law firms and dozens of Ediscovery service providers and consultancies who leverage our software to deliver better legal outcomes for their clients. And we have integrated with many of the most critical enterprise applications and systems of record that hold data that can be relevant in legal matters. The fifth pillar of our strategy is to build on and expand these relationships to nurture an ecosystem around our platform, enabling others to build businesses on top of and around Disco while we remain the technology hub for the legal function, much as companies like Salesforce and Workday have done for the sales and HR functions. In addition, we aim to become a nexus of talent in legal tech, attracting, developing, credentialing and ultimately placing a new generation of professionals as software transforms the way legal work is done. To help achieve our ambitions, we are ramping up hiring in the U.S. and internationally across the Disco organization. Our expanding team will help us continue to fulfill our near- and long-term growth and innovation plans and help us increase our share of the $767 billion market for legal services, replacing services with software. As part of our hiring plans, we are excited to announce our inaugural early leadership rotational program for top-performing university graduates. To date, we have hired more than 35 associates who will be starting with us in June across every part of our organization. We will continue to diversify our teams and bring a wide range of talent to Disco as we grow. Finally, let me highlight Disco Cares and the incredible initiatives so many Discovians have participated in and contributed to throughout the year. We care about the communities in which we live and work and want to foster a positive net impact. Despite remote work and the COVID-cautious environment, in 2021 Discovians contributed over 500 volunteer hours. Discovians logged over 80 hours supporting Code2College and Girls Empowerment Network. Through the Disco Cares technology program, we donated over 120 MacBooks across 6 greater Austin nonprofits. Disco Cares provided over 60,000 meals, and Discovians worked over 250 volunteer hours at local food banks with Feeding America in Texas, Florida and New Jersey. We are delighted with 2021 and looking forward to 2022. And now, Michael will discuss our financial results and guidance for the year.

Thank you, Kiwi. We are thrilled with what we achieved in 2021. Before I dive into our earnings results, I wanted to reflect on a couple of things. I’ve now been with Disco for over 4 years, and every day, I am amazed at the work and progress our entire Disco team has accomplished since I joined. 4 years ago, we had no $1 million customers, and today, our top 20 customers in 2021 each spent more than $1 million with us. All the growth and innovation that Disco has gone through to have the kind of results we are reporting today is a true testament to the R&D teams that build our products, the go-to-market teams that sell our products and nurture our customers, and the G&A teams that make this kind of growth and expansion feasible. I am incredibly excited for the future and next phase in Disco’s story. And with that, let’s discuss our results and guidance. In Q4 2021, revenue was $33.8 million, up 76% year-over-year. We had another strong quarter, with growth coming from new customers and continued strong expansion of existing customers. Full year 2021 revenue was $114.3 million, up 67% year-over-year. Full year revenue growth was driven by several factors, including strong growth in sales across all products, increased customer count, increased international sales and on average larger client wins and increased existing client spend on the Disco platform, true validation that what we built resonates and is valued by our customers. We are incredibly pleased with our dollar-based net retention rate as of December 31, 2021 of 146%, an exceptional outcome on the back of an incredibly strong year attributed to broad-based acceleration and expansion across our customer base as well as a number of customers with especially rapid expansion over the last four quarters. Like our revenue growth, it is possible to see variability in our dollar-based net retention rate going forward. 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 gross margin in Q4 was 74%, up from 72% in Q4 of the prior year. Gross margin for fiscal year 2021 was 73%, up from 70% for fiscal year 2020. Sales and marketing expense for Q4 was $14.5 million or 43% of revenue compared to 38% of revenue in Q4 of the prior year. This represents an increase of over $7 million in the quarter year-on-year as we continue to scale our go-to-market organization. For fiscal year 2021, sales and marketing expense was $45.8 million or 40% of revenue compared to 45% of revenue for fiscal year 2020, an increase of over $15 million year-on-year. Research and development expense during Q4 was $9.3 million or 28% of revenue compared with 30% of revenue in Q4 of the prior year. This represents an increase of over $3 million in the quarter year-on-year as we continued to invest in innovation. During fiscal year 2021, research and development expense was $32.3 million or 28% of revenue compared to 38% of revenue in fiscal year 2020, an increase of over $6 million year-on-year. General and administrative expense in Q4 was $7.1 million or 21% of revenue compared to 17% of revenue in Q4 of the prior year. This represents an increase of over $3 million in the quarter year-on-year. General and administrative expenses in fiscal year 2021 was $23.4 million or 20% of revenue compared to 19% of revenue in fiscal year 2020, an increase of over $10 million year-on-year, in part due to the associated cost of becoming and operating as a public company. Operating loss in Q4 was $5.9 million, representing a margin of negative 17% compared to negative 13% in Q4 of the prior year. Operating loss for fiscal year 2021 was $18.2 million, representing a margin of negative 16% compared to negative 32% in 2020. Adjusted EBITDA was negative $5.3 million in Q4, a margin of negative 16% compared to a margin of negative 11% in Q4 of the prior year. Adjusted EBITDA in fiscal year 2021 was negative $16.3 million or a margin of negative 14% compared to a margin of negative 29% in 2020. We efficiently invested in the scale and growth of our business, demonstrating incredible operating leverage while achieving phenomenal top line results. Net loss in Q4 was $6.0 million or negative 18% of revenue compared to a net loss of $2.5 million or negative 13% of revenue in Q4 of the prior year. Net loss in fiscal year 2021 was $18.8 million or negative 16% of revenue compared to net loss of $22.0 million or negative 32% of revenue in 2020. Net loss per share for fiscal year 2021 was $0.57 per share compared to $1.67 for fiscal year 2020. Turning to the balance sheet and cash flow statement, we ended the year with $255.5 million in cash and cash equivalents. Operating cash flow for 2021 was negative $21.6 million compared to negative $22.7 million in the prior year. Now turning to the outlook, we feel good going into 2022 with a strong pipeline, driven by an increase in our lead generation and scaled go-to-market tension. I will reiterate that our usage-based model can lead to fluctuations in revenue depending on the number and nature of matters on the platform, volume of data, length of time on the platform and other factors. Therefore, we take a prudent approach to forecasting revenues. For Q1 2022, we are providing revenue guidance in the range of $30 million to $31 million, representing 44% year-over-year growth at the midpoint. For Q1 2022, we are providing adjusted EBITDA guidance in the range of negative $12.5 million to negative $11.5 million, representing adjusted EBITDA margin of negative 39% at the midpoint. For the full fiscal year 2022, we are providing revenue guidance in the range of $146.8 million to $150.8 million, representing 30% year-over-year growth at the midpoint. As you put our 2022 growth rate in perspective, please keep in mind that we fired on all cylinders in 2021 and outperformed across every dimension. We grew revenue over 66% in three quarters of our four quarters, an 88% growth in our strongest quarter. We feel really good about the continued momentum in the business, and we are confident that the investments we are making will continue to drive best-in-class growth rate. For fiscal year 2022, we expect adjusted EBITDA between negative $51.5 million and negative $43.5 million, representing adjusted EBITDA margin of negative 32% at the midpoint. Let me take a minute to talk about our adjusted EBITDA margin guidance. 2021 proved once again that we are making the right investments to capture an increasing share of the $767 billion market for legal services, and we intend to ramp our investment in 2022 to strengthen our share of that attractive opportunity. As you have heard, our 2021 results vastly exceeded our expectations. And given the operating leverage we showed in both 2020 and 2021, we have proven our ability to expand margins when appropriate and needed. Given our confidence level and the attractiveness of this market and the unique opportunity we are pursuing, we believe investing more aggressively in 2022 is the right thing to do for the business. Our investments in the business are broad-based, but let me touch on a few key areas. We are focused on driving efficient, top-of-funnel demand in 2022 through both an increase in marketing and the expansion of our SDR program. We are proud of Disco’s historically lean marketing efforts, but it is now time to build marketing at scale. We will continue to grow our sales force both in North America and internationally. We are delighted at what our go-to-market team achieved in 2021 and recognize that we must continue to build out the team in 2022 to address a massive market opportunity. We will continue to make strategic product investments in our existing solutions and next-generation AI. We believe we have built the market-leading ediscovery solution, but are still in the early innings of software transforming the practice of law. In 2022, we are also building out our international infrastructure to support our growing base of global clients. We are confident in our ability to use these investment dollars and see a return in the medium and long-term as demonstrated by our stellar growth achieved by very efficient investment over the past year. To close, we delivered incredible results in 2021 and are very excited about 2022 and the years to come. I would like now to turn the call over to the operator to open up the line for Q&A. Operator?

[Operator Instructions] Your first question comes from the line of Koji Ikeda from Bank of America. Your line is now open.

Hey guys. Thanks for taking the questions. Congrats on a great quarter. Just a couple of questions here. First question on Hold360 and Request360. Kiwi, thank you very much for the color on the features of the products there, I was looking through the deck, and it looks like maybe one of them becomes a new SKU. Is that the right way to think about this? One of these products is a new actual growth lever for you guys from a product perspective? The other one, does that eventually get integrated within another product, and I guess, the big-picture question here, too, is that could these new products and features help accelerate the adoption of Review and Case Builder?

Thanks, Koji. Yes, the big, new product from a go-to-market point of view is Disco Hold. And the strategy there is to go one step earlier in the GC’s process. So, the way this works, when there is a new investigation or a demand letter comes in, the law requires the GC to issue legal holds, which are notifications to people who have data that they are required to preserve it and not delete it as part of general records’ retention policies and so on. And then the second step is to actually implement those holds, for example, in modern cloud services like 365, you can implement the holds in place, and then you collect that data. And then, the next step is Disco ediscovery, then Disco Review, then Disco Case Builder. So, the idea is you are providing a more complete product for general counsel. And once you are the provider of that hold in collection solution, the natural thing to do is to use our other products downstream.

Got it. Thanks Kiwi. And then just one follow-up here for Mike. Looking at the guidance, the revenue guidance for ‘22, help us reconcile kind of the starting point of 30% at the midpoint. You are finishing the year with a 146% NRR. So, the math implies that either one is way too low or the NRR is going to be coming down. So, I guess how can we think about the mechanics there? Thank you.

Koji, thanks for the question. Good question. So, we are really pleased with our outsized performance last year, with 67% growth year-over-year and also amazing Q4 growth of 76%. Really pleased with how the year turned out. As a relatively new public company, we are really prudent with our guidance. And as you know, we are usage-based so we just want to be conservative as we are providing guidance. In terms of dollar-based net retention, that number also is impacted by the variability in the usage base of the model, and so that could potentially come down again. But quite frankly, we are pleased with where that number has been all year, including where it was when we filed the S-1, and I believe it was 122%.

Got it. Thanks guys. Congrats again. Thank you.

[Operator Instructions] Your next question comes from the line of Tyler Radke from Citigroup. Your line is now open.

Hi. Good evening everyone. This is Boyoung on for Tyler Radke and thank you for taking the question. First, at a high level, I want to understand the magnitude of these acquisitions from a revenue and customer standpoint in year one. In the question before, you talked about the adoption benefits that you are getting from the other existing products that are on the platform. And then I had a follow-up. Thanks.

Sure. So, you should think of this principally as a technology acquisition, where we are adding a product to our platform that we will then use our go-to-market engine to push out, but it’s principally a technology acquisition. We did add a relatively small number compared to our existing customer base of logos, but they are marquee logos. There are a handful that overlap with our existing customer base. And one thing we were able to do in diligence is to use those existing customers as part of our diligence process to understand how they evaluated hold solutions and why they ultimately selected the products that we acquired. One large Disco customer, we were actually able to, in diligence, put this hold product into their sales motion, and they wound up selecting it. So, really good evidence there that this is the best product on the market.

Got it. And then I also wanted to ask for a little more additional context behind the deal. How long have you known the acquired asset? And what was the genesis of the relationship? And were there any other bidders out there that made the process a little more competitive? Anything along those lines would be helpful. And it seems like you already bounced some feedback off before you completed the transaction. Thanks.

Exactly. So we, of course, having been in this industry for 9 years now, keep our ears to the ground, hearing about new products, new companies and also, frankly, talking to customers and prospects about what they are seeing and what they find attractive. So, I think one of the big elements of this acquisition for us was consistent feedback, especially from large enterprises and especially when – from that tidal wave of RFPs that we talked about before that customers really want an integrated Hold, ediscovery, Review solution. So, we were going to enter this space either by building, buying or partnering. And as you also know, we invested in building up our product function with the addition of Kevin Smith, our new Chief Product Officer. One of his big remits is meeting with all these companies, understanding the innovation space, identifying things that might be good additions to the Disco platform. So, over a couple of quarters, Kevin and folks on his team got to know the team that has now joined Disco. And we went through the diligence process that I described with customers. We are very pleased with the results and are happy to have secured the deal.

Thank you so much.

Thank you. And your next question comes from the line of Brent Thill from Jefferies. Your line is now open.

Thanks. Michael, just back on the guide. I understand it’s conservative, but to go from 67% to 30%, I guess everyone’s just trying to understand. Look, in a world that reopens, one would think litigation would pick up and that the improvement of the customer retention and new wins and the investments you are putting into the sales team. So, I just – I am trying to reconcile, and I think many are that type of deceleration. Are we thinking about this right in terms of just – it does seem like as the world opens that you are going to see probably more tailwinds to the usage in your system. I want to make sure we underpin the underlying assumptions.

Yes. So, we don’t believe that we really had to tell whether it’s per se from COVID, aside for maybe that first quarter when COVID really hit. What I would say is, we are really pleased with what happened last year. And when we were sitting here with you pre-IPO, I don’t think I expect that we were going to perform as well as we did. I was confident we were going to perform well. But we came in, as you know, at 67% year-over-year. We want to be prudent in our guidance. We feel really good about the year. We are a usage-based model, as I have said before, but we also want to be prudent. It’s our third quarter, fourth quarter out.

Thank you. Your next question comes from the line of Scott Berg from Needham. Your line is now open.

This is John Godin filling on for Scott. Thanks for taking my question. As you guys think about continuing to ramp up the go-to-market motion, direct sales, just kind of curious how important is it from a customer and conversion perspective that those sales people have comprehensive understanding and ability to kind of speak the legal language? And kind of going from there, how long is it taking you guys kind of de-ramped reps ramp up to like help in understanding and be able to talk to customers? Thanks.

We think it’s, of course, quite important for any salesperson to speak the language of the people they are selling to. And because our domain is unusual, we have adopted a couple of strategies here. So first, we have three profiles of sales reps that we hire: one, our laterals from our industry, who obviously know how to speak the language; second are internal promotions from our SDR program, and that has actually generated 4 out of our top 10 quota-carrying rep performer. So, it’s a great feeder program. And over the course of their year or 2 years in our SDR program, they really learned the industry and our business. So, this issue is most acute for the third category of reps we hire, who are laterals from other high-growth software companies. What we have done for those new joiners and also for others at Disco is to make a relatively early investment several years ago now in building out our learning and development function through what we call Disco University. So, Disco University both runs formal new hire on-boarding, but also runs a series of training programs that teach people our sales motion, teach people our industry, certify people on the use of our products, and it’s the same certifications that are available to our customers and partners and so on. And then on top of that, we have a sales excellence program where we have folks who do ride-alongs with new salespeople, who listen in to their conversations and who provide real-time coaching, especially during their first six months of ramp with us. We find that salespeople are generally producing deals within their first six months. But what we find is that their productivity actually continues to increase as they grow their tenure with Disco all the way up to month 24, where they sort of stabilize because at that point, they are doing as much business as they can handle as a rep.

Thank you. Your next question comes from the line of DJ Hynes from Canaccord. Your line is now open.

Hey guys. Congrats on the stellar growth. Kiwi, this may be a silly question, but do you have to be in the cloud to effectively leverage AI in the review process? I am just trying to assess like, how much of a carrot are those time and cost savings in terms of being a catalyst to kind of coy discovery system upgrades?

Yes. That’s a sharp question. So, it’s not being in the cloud that’s the magic, it’s leveraging elastic compute in the cloud. So, if you just take old software and kind of airlift it to run in the cloud, alright, it’s in the cloud and you may get some of the security benefits of the cloud, but you are not taking advantage of the key technology innovation that makes the cloud special. And so what that is, we called elastic compute in the cloud, but it’s the ability to not have to worry about compute capacity when you write software. And this applies to our AI system in terms of training models, scoring data, updating the scores on that data and so on. But it also applies to lots of other parts of the product experience at Disco. So, when we think about ingesting huge volumes of enterprise data and not having your data sit in a queue or when we think about doing an incredible number of updates to our indexes based on all the lawyer work traffic that’s happening in our system, all of these are things that you just couldn’t do in an on-premise environment because they require huge amounts of compute that are super spiky. So, that’s the magic.

Thank you. Your next question comes from the line of Derrick Wood from Cowen and Company. Your line is now open.

Congrats as well from me. Kiwi, I mean if you look at the KPIs, you guys had a great year in a lot of respects. But in hearing over the last few quarters some of the stories you have talked about, it sounds like you have had a handful or two of large customers that really leaned into the Disco platform, and I suspect there is maybe a big driver behind the 146% retention rate. [Technical Difficulty]

Not sure if it’s us, but your audio has cut out. We cannot – operator, we couldn’t hear the rest of that question.

Mr. Derrick Wood, please go ahead with your question. Your line is cutting in and out.

[Technical Difficulty] I don’t know where – I was just saying it seems like you had a handful…

Hi Derrick, it’s kind of choppy, but I think the gist of the question is, there are some big customers. And so in the hopes that, that is your question, Michael will answer that one.

Yes, Derrick. So, we – what we have seen, and we have talked about this on prior calls is, we have seen quicker adoption of our multiproduct strategy. And so there are a few customers, but this is actually fairly broad-based in terms of a large number of customers. And we – this is in the numbers, 20 customers last year for $1 million or more. And so we did have some customers that started in Q4 of the prior year. And then when you run the dollar-based net retention, it was a big number. But the reality is it was a good number all year, and so we were pleased with what it was when we went public. We are also seeing kind of broad-based. It’s not like there’s this huge concentration. And so we feel really, really good about the growth this year and we feel good about the numbers where we ended last year across the board.

Thank you. Your next question comes from the line of Parker Lane from Stifel. Your line is now open.

Yes. Hi. Thanks for taking the question and congrats on the quarter. A lot of true success in the Review and Case Builder arena, as you pointed to some nice traction there in 2021. Curious if you could talk about those customers that haven’t crossed the goal line and adopted these new solutions. What are the main points of feedback that they are giving you? What is it going to take to get them across the goal line? And is there an inflection point that you believe you will reach there, or maybe have you already reached that?

Yes. We are – so we think one of the big growth opportunities going forward, not just for next year, but the next 5 years is driving increased attach on products two and three, Disco Review and Disco Case Builder. And then I think what you are seeing play out is the first phase of a very long-term strategy, which is to continue adding more products like that, where we get leverage both from the technology platform we have built and from the distribution that we have built. In terms of what it takes to continue driving increased adoption of Review and Case Builder, I think point number one is, it would be hard for me to imagine doing much better than we actually did, right. We grew Review adoption by more than 3x year-on-year last year, but not immaterial base. I think what you are seeing in the industry is a growing awareness that as enterprise data continues to explode in volume and as the number of legal requests continues to explode from multiple jurisdictions, solutions that are based on people and process alone simply can’t keep up. You need an AI-based, software-based solution because that’s the only way you can deal with a real scale. So, I think as more and more parts of the market come to believe what I just said, by seeing the results on a handful of matters and then growing their adoption over time, that is what is driving growth in our Review business.

Appreciate the feedback. Thanks Kiwi.

And your next question comes from the line of Mark Schappel from Loop Capital.

Hi. Thank you for taking my question and nice job on the quarter. Kiwi, starting with you, I just wondered if you could just provide some insight on how the legal service providers are responding to your threat – or as you just discussed, threat in the marketplace? Are they adopting or increasing their adoption, maybe discovering tools on their own? Are they by fighting on price? Maybe you could just talk a little bit about what you are seeing.

Sure. Look, we both cooperate with and compete with legal services providers. There are a number of legal services providers, some of whom I talked about in my prepared remarks, who have seen that there is a software revolution coming to legal and who have decided to get onboard. And these legal services providers make wonderful partners. They have been through our certification programs. They often have rich relationships in parts of the market where our direct sales force is not scaled. And it is a core part of our strategy to work with them and have them participate in the tremendous growth that I think software will bring to legal tech. But of course, there are many other services providers who are sticking to their guns and view their differentiation as being around people, process and relationships and say things like, “We are technology-agnostic.” And our point of view is to be technology agnostic in a time when the technology is fundamentally shifting and is enabling things that were simply impossible before is the wrong decision. And when we take business from these folks, we compete with them every day, customers are agreeing with us. So, it’s an industry in transition, I think is the way to think about what’s going on with the services providers. In terms of how they are competing with us, number one is to kind of repeat the mantra I put in their mouths, right, people, process and relationships over technology. Number two, some of them have attempted to build in-house kind of internal product-type solutions. And what we would say about that is there is a level of expertise in building Silicon Valley-grade software that I don’t think is present at a lot of these companies. And then third, as you say, sometimes they attempt to compete on price, and our response to that is to encourage customers to examine not the cost of their ediscovery solution but rather total project cost, which we drive down dramatically because of the fundamental increase in efficiency that comes from using software rather than services.

Great. Thank you. That’s helpful.

Thank you. And there are no further questions at this time. I would like to turn back the call over to Kiwi Camara, Co-Founder and CEO. [Technical Difficulty]

Thank you for joining us today. I am thrilled with our 2021 results, and I am excited to continue building in 2022. We have big ambitions and full confidence in our ability to scale, add new product innovations, attract increasing numbers of customers and continue the technological revolution of the legal industry. We will continue to aggressively invest in our business and the growth opportunities in front of us. In turn, we fully believe in our ability to drive long-term growth and redefine how legal professionals practice law. We thank you for your interest in Disco and for joining our fourth quarter and fiscal year 2021 earnings call.

Ladies and gentlemen, thank you for your participation. This concludes the call. You may now disconnect.