CS Disco (LAW) Q3 2025: Cecilia AI Adoption Triples, Fueling Multi-Terabyte Matter Growth
CS Disco delivered accelerated software revenue growth and marked a sharp inflection in generative AI adoption, with Cecilia AI customer usage tripling year over year. The company’s strategic pivot toward large, complex legal matters and targeted industry verticals is translating into operational leverage and improved gross margins. Management reaffirmed its commitment to balancing growth investments with profitability, signaling confidence in the durability of recent gains and ongoing product-led disruption in legal technology.
Summary
- AI-Driven Expansion: Cecilia AI adoption more than tripled, becoming a core differentiator in large-scale legal workflows.
- Operational Focus: Multi-terabyte matter growth and targeted sales execution are reshaping Disco’s customer base and revenue mix.
- Profitability Path: Leadership maintains EBITDA breakeven target for Q4 2026, prioritizing strategic investments over short-term margin gains.
Performance Analysis
CS Disco’s Q3 2025 results showed a distinct acceleration in software revenue, up 17% year over year, and total revenue up 13%, both exceeding the high end of guidance even after adjusting for a $1.3 million contingent case resolution. The company’s largest customers—those generating over $100,000 in trailing 12-month revenue—now account for 76% of total revenue, reflecting a deliberate move toward enterprise-grade, high-complexity engagements. Gross margin improved to 77%, up from 74% a year ago, driven by a richer software mix and improved data management efficiency.
Expense discipline was evident across sales, marketing, and G&A, with operating leverage supporting a $4.2 million year-over-year improvement in adjusted EBITDA. The adjusted EBITDA margin narrowed to negative 1%, while net loss was reduced to $0.6 million. Notably, operating cash flow remained negative for the year to date, underscoring the ongoing investment cycle. Services revenue, including Managed Review and professional services, contributed $5.7 million, highlighting the company’s hybrid software-plus-services model for complex legal matters.
- Customer Concentration Rises: 326 customers now contribute over $100,000 each, representing 76% of revenue and signaling deepening enterprise penetration.
- AI Adoption Drives Usage: Cecilia AI and AutoReview saw significant sequential and year-over-year growth in adoption, with Cecilia AI revenue up more than 12x at a flagship client.
- Margin Expansion: Gross margin climbed to 77%, reflecting operational scale and higher-value software deployments.
Disco’s performance this quarter reflects a successful pivot toward high-value, scalable legal technology solutions, with AI at the center of its value proposition.
Executive Commentary
"This quarter, we saw continued growth in revenue from both large and small matters, with acceleration in revenue from multi-terabyte matters. We are also very pleased with the continued adoption that we are seeing related to our suite of generative AI capabilities, including Cecilia AI and our AI-driven auto review. The number of customers utilizing Cecilia AI over the quarter more than tripled year over year, and we've experienced consistent sequential growth in auto review adoption throughout 2025."
Eric Friedrichson, Chief Executive Officer
"Our gross margin in Q3 was 77% compared to 74% in the prior year. As we mentioned before, our gross margins fluctuate from period to period based on the nature of our customers' usage, for example, the amount and types of data ingested and managed on our platform."
Michael LaFerre, Chief Financial Officer
Strategic Positioning
1. Generative AI as a Competitive Moat
Cecilia AI, Disco’s proprietary generative AI suite, has rapidly become a cornerstone of its platform differentiation. With customer usage more than tripling and revenue at key clients growing over 12x year over year, Cecilia’s integration into core legal workflows—such as Q&A, document summarization, and auto review—has proven sticky and defensible. The platform’s ability to provide citation-based, context-aware answers directly from customer data sets it apart from generic large language model (LLM) wrappers, addressing both accuracy and trust for legal professionals.
2. Focus on High-Complexity, High-Stakes Legal Matters
Disco’s refined go-to-market strategy now targets large, multi-terabyte legal cases and specific matter types such as intellectual property (IP) litigation. This focus leverages the platform’s strengths in handling complex, technical document types and aggressive court timelines, enabling Disco to displace legacy e-discovery solutions in demanding environments. The company’s new territory-based account orchestration and lead generation model is already yielding faster sales cycles and deeper client penetration.
3. Operational Leverage and Margin Expansion
Improved sales efficiency and disciplined expense management have driven meaningful operating leverage. Sales and marketing as a percentage of revenue declined to 33% from 38% a year ago, while gross margin benefited from a higher mix of software revenue and optimization of data ingestion workflows. The company continues to invest in R&D, particularly in AI and core platform scalability, to sustain product leadership and customer retention.
4. Hybrid Software-Services Model
Disco’s services business, including Managed Review, remains a strategic complement to its software platform, especially in large-scale deployments. This hybrid approach enables the company to capture a broader share of client spend and deliver end-to-end value in complex matters, reinforcing relationships and supporting upsell opportunities.
Key Considerations
Disco’s Q3 underscores a decisive shift toward enterprise-scale legal technology, with AI adoption and operational discipline driving both growth and margin resilience.
Key Considerations:
- AI Differentiation Deepens: Cecilia AI’s product maturity and integration into core workflows are setting a new standard in legal tech, challenging legacy incumbents.
- Customer Profile Evolution: The increasing share of revenue from large, complex matters and high-value clients is reshaping the company’s risk and opportunity landscape.
- Sales Execution Gains: Faster sales cycles and targeted account orchestration are translating into improved customer acquisition and retention metrics.
- Profitability Discipline: Management’s willingness to delay EBITDA breakeven in favor of growth investments reflects conviction in long-term market share capture.
Risks
Disco faces several risks as it scales its AI-centric platform: The legal tech market is rapidly evolving, and competitive responses from legacy and emerging vendors could pressure pricing and customer retention. The company’s reliance on a small number of large clients increases concentration risk. While contingent revenue arrangements are rare, they introduce some unpredictability to results. Sustained negative cash flow and ongoing investment cycles may extend the path to profitability if revenue growth falters or market adoption slows.
Forward Outlook
For Q4 2025, CS Disco guided to:
- Total revenue between $38.75 million and $40.75 million
- Software revenue between $33.75 million and $34.75 million
- Adjusted EBITDA between negative $3.5 million and negative $1.5 million
For full-year 2025, management maintained guidance:
- Total revenue $154.4 million to $156.4 million
- Software revenue $132.6 million to $133.6 million
- Adjusted EBITDA negative $11.5 million to negative $9.5 million
Management emphasized continued investment in AI and go-to-market capacity, and reaffirmed the Q4 2026 EBITDA breakeven target.
- Guidance excludes further large contingent case impacts
- Focus remains on high-value, scalable matters and product-led differentiation
Takeaways
CS Disco’s Q3 2025 results highlight a successful pivot to AI-driven, large-scale legal technology, with operational discipline supporting both growth and margin improvement.
- AI Adoption Accelerates: Cecilia AI’s tripling in customer usage and multi-fold revenue growth at flagship clients validate Disco’s product-led disruption strategy.
- Strategic Focus Yields Results: Targeting high-complexity matters and enterprise customers is reshaping the revenue base and supporting margin expansion.
- Profitability Path Remains Measured: Management’s reaffirmed EBITDA breakeven target for Q4 2026 signals confidence in the durability of recent gains but underscores ongoing investment needs.
Conclusion
CS Disco’s Q3 marks a clear inflection in AI-led product adoption and operational execution, with a sharpened focus on high-value legal matters and disciplined growth investments. The company’s ability to sustain momentum in enterprise penetration and AI differentiation will be central to future upside and risk management.
Industry Read-Through
The rapid adoption of generative AI in legal workflows at scale—evidenced by Disco’s Cecilia AI traction—signals a broader shift in legal technology from legacy e-discovery toward integrated, AI-powered platforms. As law firms and corporate legal departments manage ever-larger data volumes and demand greater speed and accuracy, vendors able to deliver defensible, explainable AI will gain share. The hybrid software-services model is gaining traction for complex matters, highlighting the value of end-to-end solutions. Incumbents slow to modernize risk losing relevance as AI-native platforms set new standards for performance and user experience.