CS Disco Earnings Call: AI Growth Amid Profit Strain

Cs Disco, Inc. ((LAW)) has held its Q4 earnings call. Read on for the main highlights of the call.

CS Disco’s latest earnings call struck a cautiously upbeat tone, with management emphasizing accelerating software growth, improving margins and rapid adoption of its generative AI tools. Investors also heard frank commentary on weaker services revenue, negative cash flow and ongoing operating losses, but management argued that product and commercial changes position the company for stronger, higher‑margin growth ahead.

Q4 Revenue and Software Growth

Q4 revenue reached $41.2 million, rising 11% year over year, while software revenue grew 14% to $35.1 million. That marked the third straight quarter of accelerating software growth once a prior one‑time contingent deal is excluded, underscoring growing traction in the core platform despite headwinds in legacy services.

Full-Year Revenue and Software Momentum

For fiscal 2025, CS Disco posted total revenue of $157.0 million, up 8%, with software revenue advancing 12% to $134.0 million. Management highlighted that software growth has steadily accelerated from 3% in 2023 to 7% in 2024 and now 12% in 2025, signaling a maturing, subscription‑driven model taking hold.

Improving Profitability Trends

Profitability metrics moved in the right direction even though the company remains in the red. Q4 adjusted EBITDA was a loss of $2.2 million, a negative 5% margin versus negative 12% a year ago, and full‑year adjusted EBITDA improved to a $10.2 million loss, with net loss narrowing to $10.7 million or $0.17 per share.

Strong Gross Margin and Efficiency Gains

Gross margins stayed robust at 77% in Q4 and 76% for the year, up from 75% in 2024, reflecting the economics of the software mix. Sales and marketing spend fell to 35% of revenue from 39% as the company trimmed headcount and marketing costs, suggesting better go‑to‑market efficiency even as it pursues growth.

Large-Account Concentration and Retention

CS Disco is increasingly anchored by larger customers, with 330 accounts generating more than $100,000 over the last 12 months and contributing $119 million, or 76% of revenue. Twenty customers each produced more than $1 million, and software dollar‑based net retention exceeded 103%, although total dollar‑based net retention landed at a softer 98%.

Generative AI and Auto Review Adoption

Management reported a sharp uptick in generative AI usage, citing a dramatic multi‑year increase attributed to new AI features and strong demand for its Auto Review product. Revenue from multi‑terabyte matters grew more than 30% year over year in Q4 and total data volumes on the platform hit record levels, highlighting the value of AI‑driven workflows in large, complex matters.

Product and Commercial Improvements

The company is reshaping its commercial model, rolling out a unified offering that bundles its Cecilia AI into each matter and shifting to per‑gigabyte pricing aligned with data growth. Contracting has been simplified, and early tests suggest the changes can boost win rates, reduce discounting and expand long‑term revenue and gross margins as customers scale usage.

Healthy Balance Sheet

CS Disco ended Q4 with $114.6 million in cash, cash equivalents and short‑term investments and carries no debt. Management believes this liquidity is sufficient to fund ongoing product development and growth initiatives, giving the company room to invest despite near‑term operating losses and negative cash flow.

Services Revenue Decline

Not all lines are growing, as services revenue fell 3% in Q4 to $6.0 million and declined 8% for the year to $22.8 million. The drop stems from a shrinking traditional review business, which remains labor‑intensive and service‑heavy, reinforcing management’s strategic pivot toward higher‑margin software and AI‑enabled workflows.

Negative Operating Cash Flow

Operating cash flow worsened to negative $14.9 million in fiscal 2025 from negative $8.7 million in 2024, even as adjusted EBITDA improved. The gap underscores working‑capital dynamics and ongoing investment needs, and it highlights that investors must still factor in cash burn until the business model matures further.

Near-Term Profitability Headwinds

Guidance points to a step back in near‑term profitability, with Q1 2026 adjusted EBITDA expected between negative $6.0 million and negative $4.0 million versus the Q4 loss of $2.2 million. The company attributed this to higher employee costs and one‑time sales and marketing events, and full‑year 2026 adjusted EBITDA is still projected to be negative despite sequential improvement.

Retention and Multiproduct Adoption Challenges

Total dollar‑based net retention of 98% fell just short of the 100% line investors typically view as fully stable, implying some churn or downsizing outside the strongest software cohort. Multiproduct attach stood at only 19% even including AI offerings, signaling substantial cross‑sell opportunity but also limited current penetration across the broader customer base.

Rising R&D Spend and Competitive Risks

Research and development spending rose by more than $4.5 million year over year and reached about 31% of revenue, keeping the company unprofitable on both GAAP and non‑GAAP bases. Management argued this investment is necessary to defend a purpose‑built AI moat amid intensifying noise from general‑purpose AI entrants, but acknowledged ongoing execution and perception risks.

Forward-Looking Guidance and Outlook

For Q1 2026, CS Disco guided revenue to $39.0 million to $41.5 million with software at $33.75 million to $35.25 million and adjusted EBITDA between negative $6.0 million and negative $4.0 million. Full‑year 2026 guidance calls for $167 million to $177 million in revenue, $145.5 million to $152.5 million in software and adjusted EBITDA between negative $8.5 million and negative $4.5 million, with management reiterating a path toward breakeven later in the year.

In sum, CS Disco’s earnings call painted a picture of a software‑led, AI‑driven growth story that is steadily gaining momentum while still wrestling with cash burn and unprofitable operations. For investors, the key question is whether accelerating software adoption, improving margins and disciplined spending can offset services shrinkage and competitive pressures quickly enough to deliver on the 2026 breakeven ambition.