Good morning, ladies and gentlemen, my name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the FiscalNote Second Quarter 2023 Earnings Conference Call. Today’s conference is being recorded and all lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you, and I will now turn the conference over to Sara Buda, Vice President of Investor Relations. You may begin.

Hi, everyone. Welcome to the FiscalNote Q2 2023 earnings call. During this call, we may make certain statements related to our business that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance, but rather are subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC’s EDGAR system and our website as well as the risks and other important factors discussed in today’s earnings release. Additionally, non-GAAP financial measures and other KPIs will be discussed on this conference call. Please refer to the tables in our earnings release and the Investor Relations portions of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I’d like to turn the call over to FiscalNote’s Chairman, CEO and Co-Founder, Tim Hwang.

Thank you, Sara. On today’s call, we review our second quarter results, our outlook for the remainder of the year and discuss our durable compounding revenue, strong gross margins and the macro trends driving our business. I’ll also talk about our Q3 guidance and our expectation to reach the inflection point of adjusted EBITDA profitability in Q3 a quarter earlier than expected. This will be a tremendous milestone for the company and reflects the hard work of the entire FiscalNote team to be able to achieve this ahead of schedule. Also touched on our positive growth trends, particularly with our enterprise accounts as we innovate around new products and customer segments. I’ll then turn it over to our CFO, Jon Slabaugh, to talk about the details of our financials as we continue to deliver on our strategy as a profitable, long-term growth compounder. Let me start with a very brief reminder of our mission here at FiscalNote and the value we bring to more than 5,000 customers every single day. At FiscalNote, we’re on a mission to help our customers make sense of the complicated and constantly changing world we live in by delivering our proprietary AI-enabled platform that aggregates and organizes regulatory, political and macroeconomic information and analyze the impact on their organization. Changes in policies, regulations and laws impact the decision-making of almost every organization around the world. With our proprietary AI capabilities, we aggregate, synthesize and analyze mass amounts of legislative policy, regulatory and macroeconomic data and information around the world and provide actionable intelligence to customers in a subscription model. As such, we’re building an enduring company for the world’s most important and influential decision-makers from hundreds of government agencies and public sector customers from the Department of Defense, the White House, every member of the…

Thank you, Tim, and good morning. I’m going to spend some time providing further details on the quarter. I’ll also discuss what to expect in terms of financial performance for this year. Let me start with revenue. Second quarter GAAP revenue was $32.8 million, marking year-over-year growth of 21%. On an organic basis, GAAP revenue grew 10% year over year and 8% on a non-GAAP basis after excluding the deferred revenue adjustment impacting 2022. We continue to deliver solid organic growth complemented by accretive strategic tuck-in acquisitions. This has been our track record, and we expect to continue this revenue performance moving forward. Second quarter subscription revenue, which makes up 90% of our total revenue, was $29.5 million. This is an increase of 21% from a year ago and 9% on an organic basis, excluding the noncash deferred revenue adjustment in 2022, once again, showing our strong recurring revenue model. Our advisory and other revenue was $3.4 million, a $500,000 increase year over year. We exited Q2 with run rate revenue of $135 million in total, marking 17% year-over-year growth. Run rate revenue is defined as ARR plus nonsubscription revenue earned during the past 12 months. It is a key management metric and serves as a baseline for subsequent quarters and beyond. On an organic basis, run rate revenue was $126 million, reflecting 6% growth on a pro forma basis as defined in our press release. NRR, or net revenue retention, for the quarter is approximately 98%. As we’ve said, NRR rates are highest among larger enterprise accounts. Enterprise and strategic accounts now represent our largest, fastest-growing, highest retention customer group. We have recently taken steps to allocate more sales and marketing resources to large strategic accounts and expect this to drive increasing total NRR. We grew total annual recurring…

Thank you. [Operator instructions] And we will take our first question from Mike Latimore with Northland Capital Markets. Your line is open.

Great. Thanks a lot. Yes. Congrats on the strong results and outlook here. As you look to the second half of the year here, bookings obviously tend to be higher than first half. I guess, the pipeline coverage relative to your expectations, how is that looking? How does it compare to prior years?

Hi, Mike. It’s Jon Slabaugh. Thanks for the question. Regarding pipeline, I’ve got Josh Resnik here. And he works closely with Rich, and I’ll let him take that question.

Yes. Hey, Mike, thanks for the question. So, yes, pipeline so far into Q3 is looking promising. We – as we’ve talked about – we’ve made some changes in the sales organization, which we think are going to be driving higher productivity, both in terms of how the teams work and in terms of the sectors that we focused on. So, right now, we’re feeling good about where we’re headed for the second half.

Great. And within that pipeline, maybe you can you talk a little bit about the vertical mix. Is it – does it look more like enterprise here, commercial versus government? And then also anything more skewed to new logos versus upsells?

Yes. So, it’s a balance of private sector and public sector – enterprise and public sector. We are – in a macro environment like this, it’s always a little more challenging on the new logo side as compared with retention. But we’re seeing – but we’re still seeing, all things considered, some good growth on the new logo side. And sorry, Mike, I may have lost track. What was the rest of your question?

Just wondering if the pipeline mix of new logo versus upsells has changed relative to, say, prior years.

No. I mean, it’s relatively steady compared to prior years. So, like I said, in this macro, new logo is always going to be a little harder than retention, but it’s relatively consistent.

And then just on the Risk Connector, very interesting launch. How is the pipeline looking for that? What kind of deal sizes are you seeing? What kind of verticals are interested?

Yes. So, we’re actually seeing good pipeline build there and a pretty broad pipeline. It’s – the product is applicable across industries. So, we’re feeling good about where that’s going. And we expect deal sizes to be relatively large compared to our average ACV. We’ve got multiple pricing tiers in play but generally expect a lot of these deals to be six figures.

Hey, Mike. Just something to just to kind of jump in with your – going back to your last question. We kind of alluded to this in the earnings kind of script earlier on the call, but we are seeing very good traction with our largest enterprises. And a lot of that is being driven by our NRR rates in that large enterprise group. So, we’re talking Fortune 100, Fortune 500 businesses that are seeing quite a large amount of expansion by adding new data sets, adding new kind of capabilities onto our platform. And so, even in just Q2, we saw a pretty large expansionary wins pretty much across the board in retail, manufacturing, energy, healthcare, and other sectors. So, as those large enterprise customers to continue to compound and add new capabilities, we could expect that, over time, a larger mix of our underlying revenue should be coming from those larger businesses overall.

All right. Makes sense. Thank you.

We will take our next question from Richard Baldry with ROTH MKM. Your line is open.

Thanks. Can you maybe talk a little bit about on the AI side? I guess the odd question where people say, well, won’t AI make what they do easier at FiscalNote. And I think the obvious – the answer is no, but I think hearing it from you will probably help alleviate any confusion around that.

Yes. Yes. So, the way we think about it is two fronts, right? So, can we automate some of the things that we’re doing already within our operating expenses using AI? And so there are areas, for instance, in customer acquisition or in data acquisition, things like that, where we’re retooling some of our internal kind of capabilities. Specifically within R&D, I think that we have seen our market leadership extend ourselves largely because of the partnerships we’ve executed with OpenAI’s ChatGPT, Google Bard, Microsoft Bing, and so on and so forth. And those things sort of enable us to be able to reduce our R&D expenses by sharing the load with these large-language models and the like. And so, that’s why you’re seeing this reduction in R&D expense relative to operating expenses. Now, those are also obviously nice to have some things and obviously drive some level of profitability. But at the end of the day, we need to build a great business, and a great business is determined by having a great product. And so, for us, that – you can sort of see that in, for instance, the launch of FiscalNoteGPT, where we’re combining all of our data, the decade-long investment that we have in legal and regulatory information, and then the ability to be able to kind of combine that with our own language models to be able to create things like question-and-answer systems, summarization capabilities, and other things that are unlocking new capabilities overall. So, it is this combination of sort of reducing operating expenses and also creating new capabilities that I think are just unparalleled in terms of the ability to be able to create these types of capabilities overall.

And can you talk about whether this rapidly emerging AI segment – it’s a lot of technology shifts going on. Do you think it’s causing any confusion that’s slowing sales cycle? Or do you think it’s just broadening the sales pipeline, like people are sort of more interested now in these types of solutions?

I think that we are adding value to the customers that we have today and also expanding what we are capable of doing to new customers, right? So, our existing customers are going to benefit from these new capabilities, right, the ability to provide summaries and create automated insights and things like that. The ability, for instance, to pull up a Word document and automatically populate the entire summary of regulatory context immediately. But at the same time, these capabilities are also enabling us to create new products. So, Risk Connector is a great example. FiscalNote, we’ve historically have not played in the supply chain analytics and software market. And now, we are because we can leverage the data that we have, create new software, and enter the market kind of supporting a new buyer within the enterprise, folks who focus on sustainability, focused on supply chain risk, and so on and so forth. And so, it’s this combination of AI-driven innovation that drives new total addressable market that drives really a new revenue opportunity for us overall.

And you called out the sort of mismatch between how overregulated Europe maybe versus the contribution to revenue. So, how do you feel about your international sales capacities, the headcount efficiencies they’ve gotten up to the reach they’ve got? And do you think you’re – even being careful on costs, you’d be adding over there? Thanks.

We are definitely in the early stages of growth in Europe and Asia. And I’ll let Josh kind of compound on this a little bit. But as I mentioned, 13%, 14% of our revenue today comes from the European market. Substantially lower portion of that comes from Asia. We are expanding definitely in each of the country markets in the European market. Obviously, we are in the early stages, and so we’re still building infrastructure and capacity, but we’re doing it in a very thoughtful way that drives sustainable compounding growth and enables us to sort of build that long-term infrastructure. But I don’t know, Josh, if there’s anything else you wanted to have in your end.

Yes. Sure, Tim. I can just add that generally speaking, we are seeing strong demand for our products in Europe and Asia. We see a lot of opportunity for growth there, both organically and inorganically over time. We have strong bases of operations in both areas. We have offices throughout Europe and Asia, including Korea, Singapore, Australia. And so, we see a lot of opportunity there, and we expect to take advantage of that in a very strong way.

Great, thanks. And congrats on the profitability improvement.

We will take our next question from Matt VanVliet with BTIG. Your line is open.

Yes, thanks. Appreciate the time this morning. Just maybe one more on a little bit of additional commentary on the AI front. Obviously, it’s been embedded in the platform in a number of ways and is really sort of the engine that drives all this. But as you look at something like FiscalNoteGPT, do you expect to have more sort of directly generative AI or other kind of AI-focused products to delineate the fact that this is a way to monetize something you have tremendous expertise in? We see the partnerships with Google and OpenAI. Or is this kind of the extent of what you’d expect on a product road map and really is kind of leaning into just further embedding it in more functionality across the existing customer – or the product portfolio?

Yes. So, just to touch base a little bit on that FiscalNoteGPT point. So, we’re very excited by FiscalNoteGPT. It’s the first proprietary platform incorporating generative AI and large-language models for legislative, statutory, regulatory, and policy information. And like other generative AI systems, the interaction with customers are such that it enables them to identify emerging concerns or generate new insights, summarize timely issues. We view these things in the long-term as table stakes. They need to be embedded in our platforms because customers are going to expect it. I do think that FiscalNoteGPT is an interesting opportunity in the sense that it is a platform in and of itself. And so the ability, for instance, to leverage our language models, for instance, in partnership with other software companies. For them to be able to leverage our APIs, for them to build the applications on top of it, those are all new capabilities and new revenue streams that we see in the mid to long term. And so, it’s not just the platform that we’re – and the applications that we’re delivering for our customers, but what we’re doing with this product launch essentially is creating a new technology platform around the legal and regulatory capability for other partners and ecosystem to kind of participate in overall.

Okay, very helpful. And then as you look at the products, you talked about sunsetting. Any specifics you can share around which products? Or maybe more importantly, kind of what the exact revenue impact is this year versus the previous plan? And maybe more importantly, how does this impact growth – or how much of a headwind to growth does it present in fiscal 2024, understanding that focusing resources is key here, but just kind of wanting to make sure we’re adjusting our forward models appropriately?

Yeah. So, I’ll kind of start off, and then I’ll pass over to Jon and Josh here. But what I would say philosophically is that at our company, we look at every single product line and line it up against gross margin, EBITDA impact growth potential, and then we dynamically allocate capital. So, in our case, mostly people and technology resources against the products that grow the fastest and have the most profitability potential. So, from time to time, what we’re going to do is we’re obviously going to reallocate capital into things that we’re seeing are growing faster in the market. So, for instance, if we saw Risk Connector was growing very, very quickly, we pull sales and marketing R&D resources off of a different product and throw it into Risk Connector to try and drive more growth and more profitability. And so, we do have a high degree of visibility on GAAP revenues for – on an ongoing basis, and that’s largely because of the way that we recognize revenue. But sunsetting different product lines or allocating capital in different product lines will probably create some level of variability on run rate revenue, largely because of the way that we kind of recognize ARR and the like. And so, I do think that we are going to continue to be very dynamic. But as we said before, the focus that we’ve had on profitability override everything at the current moment as we kind of – we’re trying to drive that double-digit EBITDA margin – adjusted EBITDA margin have grown into the future. But I don’t know, Josh, Jon, do you want to add anything else on your end?

Sure. I’ll put a little bit of a finer point on it. Matt, we made the disclosures around the impairment charge we took on equilibrium ESG product. We feel like our ESG portfolio is strong and still think that’s a growth area for the business long term, but that benchmarking tool just didn’t have the traction that we wanted to see. So, we decided to kind of focus in other areas. That will have an impact, which is partially a contributor to why we narrowed the run rate revenue range for the end of the year. But ultimately, we feel like the realignment of the sales force, generally focusing on large enterprise, will make up for that and more as we drive forward and get back into kind of the long-term growth profile that we want to see.

All right. Great. Thank you.

We will take our next question from Rudy Kessinger with D.A. Davidson. Your line is open.

Great. Thank you. I want to dig into the assumptions in the guide in the second half. What are you assuming as far as close rates and sales productivity? Are you assuming improvement on metrics such as that? It’s just that the guide continues to look fairly aggressive in terms of showing an acceleration in growth on a year-over-year basis. You’re about the only public software company that I’m aware of that’s guiding to that in the second half of this year.

Thanks, Rudy. And what I’ll say is we look closely at prior years as precedent to determine kind of what we expect the close rates to be in the third and fourth quarters, we’ve put forward a range based on kind of the midpoint of what we saw in the prior two years and feel like the pipeline coverage, as Josh talked about, kind of validate those assumptions and monitor closely as we go forward.

Okay. And then just on cash flow or cash burn in the second half. How should we think about that relative to you be got about $10.5 million in cash interest expense in the second half? Or maybe put differently, where do you envision your cash balance bottoming?

The seasonality of the cash is such that kind of the end of December is the low point, we have significant collections in the first quarter, and we see that kind of being no different this year. I don’t – we’re looking at cash models pretty closely but haven’t really provided any kind of specific guidance around the cash balance at the end of the year. But feel like it’s certainly adequate to meet all the requirements we have, provide a level of safety and securities we operate going forward, and will continue to rebuild in Q1 of next year. Obviously, as part of this, our filings, we look closely at go-forward cash positions and comfortable where we stand.

Got it. Thank you. That’s it for me.

[Operator instructions] And we will take our next question from Mike Albanese with E.F. Hutton. Your line is open.

Hi. Yes. Thanks for taking my question. Just kind of want to build off the last regarding cash, cash burn, and then this kind of relates to, I guess, the product pipeline as well. But obviously, you’ve launched a number of new products, new partnerships, some additional patent wins. Essentially, you’re continually innovating. I mean, what can you tell us as that relates to kind of your capital expenditure and R&D moving forward? And maybe you can give us a little bit more color on your expectations into the back half of the year into 2024.

So, our cash capital expenses have been running kind of in the neighborhood of $2 million per quarter. We don’t really foresee that increasing and may actually kind of remain flat or decrease a little bit over time. We are capstoning a number of kind of internal projects that we’ve been working on over the last 18 months. I feel like, as we bring those to market, the expenses will begin to kind of come down. Obviously, we’ve given some guidance around the interest – cash interest expense as well. Other than that, those are kind of the two big ones. And then as a source of cash, we look at growing subscription income as source of additional cash as deferred revenue balances continue to increase. Is that…

Got it. Okay. Thank you.

Is that what you were looking for, Mike?

Yes, that’s helpful. And then just lastly, and this is more of a general question here. Obviously, you moved up your expectations of profitability or at least on an adjusted EBITDA basis by a quarter. It seems like the cost-cutting initiatives have been going well. I mean, any general takeaways or any major learnings that you got a chance to really take a look under the hood over the last few quarters here?

I’ll let Josh really dig into the details there, but I think it’s been a good process for us to go through. It gave us an opportunity to kind of look through the multiple acquisitions we did for ways to bring efficiency to the organization. We also focused on some of the legacy operations and ways to integrate more seamlessly. And we’ll continue to do that going forward. Josh, I don’t if you want to add on to that.

Yes. Sure, Jon. Yes. So, Mike, I mean it’s really been a top-to-bottom review of our entire organization and all our operations. And as Tim said before, it’s about a realignment around sustainable and profitable growth. And so, it’s been a matter of shifting resources to areas of highest potential. Enterprise being a core segment for us, but also the new products that we’ve launched like Risk Connector. And then being willing to very quickly and decisively make decisions on other products that aren’t in line with that profitable growth profile that we’re seeking. We’ve made changes throughout in terms of how the teams operate, leveraging technology and AI to operate more efficiently, realigning teams, and really shifting our entire operational model throughout. And I think that it is providing us with a better platform for growth for the future in addition to driving that profitability.

Got it. Well, thank you for taking my questions, and congrats on a nice quarter.

Thank you.

And we will take our final question from Zach Cummins with B. Riley Securities. Your line is open.

Yes, thanks. Good morning. Thanks for taking my questions. Can you just build a little bit more upon kind of the reallocation of resources within the sales force? Kind of what were really some of the key changes that you made in terms of go-to-market approach and kind of what you’ve been seeing from those incremental changes here in the last couple of months?

Sure. This is Josh. I can take that. So, as we’ve discussed a lot of shift to enterprise. So, adding a new strategic accounts team to go after the largest accounts, shifting some resources away from smaller accounts like SMB. We have realigned our account management and customer success teams to better drive retention and upsell cross-sell. We have been much more rigorous in performance management and optimizing headcount throughout the organization. We’ve also focused a lot on improved sales operations and sales enablement – so, having that kind of operational engine behind it, being really finely tuned to be able to drive the entirety of the organization forward and having our new Chief Revenue Officer, Richard Henderson, come in and establish a really strong leadership over the organization and a real direction towards scaling the profitable growth that we’ve talked about. And I’ll add to – while we’ve gone through a significant amount of change already, we still have initiatives underway around optimizing things like pricing, bundling, and packaging the products to even further drive growth and further drive that upsell and cross-sell, continuing to improve our efforts on account management, customer success, and then leaning further into things like partnership strategy, which Tim spoke about earlier, and we’ve talked about previously with things like our relationship with Peraton. We’re already seeing some traction. And continuing to go further into partnerships as well.

Understood. And final question for me really is just around kind of overall customer sentiment. I mean, have you seen any material change in terms of buying patterns from especially kind of your enterprise customers and government agencies here in the last couple of months maybe versus what you saw at the beginning of this year, end of last year?

Yes. I would say that in terms of what we’ve seen in terms of sentiment, I would say, on the enterprise side, in particular, we continue to see – consistent with what we’ve talked about in past quarters, we’ve continued to see some budget challenges and some elongated sales cycles for that reason. Overall, we’re seeing a lot of strength and resilience in our core policy products and in our community offerings. We’re seeing strong demand for our security intelligence out of Dragonfly. A lot of interest, as I mentioned before, across the board, across sectors in Risk Connector. So, we’re seeing large enterprises are having increasing concerns about vulnerabilities in their supply chains and the risk associated with it. And I’d say we’re also seeing enterprises turn to us for combined intelligence that we can offer around geopolitical, macroeconomic, and security issues because those are all intertwined for a large enterprise. And so, we have clients who are focused on – we have a large Fortune 500 global manufacturer who’s been concerned about tensions with China and Taiwan, and so, looking at related policy implications, potential impacts from sanctions and tariffs, and looking for a macroeconomic view as to other regions where they can invest now to offset negative impacts. So, bottom line is we are seeing large enterprises with a lot of concerns about what’s happening globally and trying to make plans for how they can continue their growth paths going forward.

Understood. Well, thanks for taking my questions, and best of luck with the rest of the quarter.

Thank you.

And there are no further questions at this time. I will now turn the call back to Mr. Tim Hwang for closing remarks.

Great. Thank you, everybody, for jumping on the call here. And we look forward to continuing to execute on our plan, delivering on profitability and just growing a long-term growth company business. Appreciate the time. Thank you, everybody.

And this concludes today’s conference call. We thank you for your participation. You may now disconnect.