August 12, 2022
CS Disco (LAW) is getting hammered today after the company lowered full-year guidance. The main issue is that the company’s Review solution isn’t selling as well as expected. The idea here is that revenue per customer jumps when they add more modules to the eDiscovery solution. This is a standard software business model.
LAW Reports, INSP Raises Cash, RANI Cancels Stock Offering
CS Disco (LAW) is getting hammered today after the company lowered full-year guidance. The main issue is that the company’s Review solution isn’t selling as well as expected. The idea here is that revenue per customer jumps when they add more modules to the eDiscovery solution. This is a standard software business model. But if newer modules (i.e. Review in this instance) aren’t purchased then the growth model for the company changes (in this case lower). To put things in context, management says customers that add Review to eDiscovery spend up to two or three times as much. That is rather significant, especially when considering that a single Review customer could spend around $1 million in a quarter. If a few of those deals aren’t present that stings, especially when dragged out for a few quarters.
Revenue in the quarter grew 14% to $33.7 million (versus consensus of $33.4 million). Customer count grew 27% to 1,255. Full-year guidance was reduced to a range of $132 - $136 million (+15% to +19%) which is WAY below previous guidance of +32% growth and consensus of $152 million. Adjusted EBITDA guidance was reduced by $10.5 million to -$58 million (at the midpoint), well below consensus of -$46 million. Big picture, LAW could certainly bounce back. But there’s no doubt guidance is a disaster and the stock is going to be in the penalty box until there is clear and compelling evidence that revenue growth isn’t going to be jumping and diving quarter to quarter.
As far as what to do now, there will almost certainly be some sort of dead cat bounce in the next week or so. The stock is trading below 15 and most analyst price targets are going to land in the mid-20s. Maybe LAW grinds back up into the 15 to 20 range in the coming months. The question is whether you want to sit on the stock and wait for that while forgoing other potential opportunities. In this environment, I’m not inclined to do that. I suggest winding down your position starting today and wrapping up a full sale into a (hopeful) bounce next week. SELL REMAINING HALF
Inspire Therapy (INSP) announced a secondary offering yesterday that just priced at 215 (INSP closed at 226 yesterday). This will knock the stock down 3% to 5% today but I suspect investors will see the roughly $215 million capital raise as helping to propel long-term growth and INSP will bounce back. I’ve had the stock at hold and will keep it there. HOLD
Rani Therapeutics (RANI) just cancelled its stock offering, saying current market conditions are not conducive for an offering on terms that would be in the best interests of the company’s stockholders. That seems to be a good call after the stock dropped 25% on news of the offering yesterday. RANI is bouncing back today. Given all this volatility, I’m going to move the stock to hold for now. HOLD