Good morning. My name is Wilson, I will be your conference operator today. At this time, I would like to welcome everyone to the FiscalNote Third Quarter 2023 Financial Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Sara Buda, Vice President of Investor Relations. You may begin.

Hi, everybody. Welcome to the FiscalNote Q3 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 the 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 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 will review our third quarter results which mark our first quarter of adjusted EBITDA profitability. This is a tremendous milestone for the company. A year ago, we committed to adjusted EBITDA profitability, and that is exactly what we've delivered. In fact, we've delivered this one quarter earlier than we originally forecast, even amidst the more challenging macroeconomic environment. If you look at where we were when we began this year, we've essentially shifted our adjusted EBITDA from minus $7 million per quarter loss in Q1 to positive adjusted EBITDA in Q3. This is an annualized improvement of over $30 million in adjusted EBITDA, as compared to where the company started this year in Q1. We have been laser focused on this milestone, and we are delighted to achieve it ahead of initial expectations. At the same time, we have made significant investments to accelerate our decades long leadership in AI, aligned our sales teams on the highest growth customers and refined our product portfolio. Now as we end 2023, it is time to build on foundation and turn our focus towards re-accelerating growth. I'll get into the details of that growth strategy shortly. First, let me remind you of our mission here at FiscalNote and the value we bring to more than 5,000 customers every day. At FiscalNote, we're on a mission to help our customers make sense of the complicated and costly changing world we live and delivering a 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 impacted decision making of almost every organization around the world. Using our proprietary AI capabilities ,we aggregate, synthesize and analyze massive amounts of legislative policy, regulatory and macroeconomic…

Thank you, Tim. And good morning. I'll spend some time going through the details of our quarter and then I'll walk through some of the operational changes we've made in our commitment to ongoing adjusted EBITDA growth moving forward. Let me start with a quarter. Third quarter GAAP revenue was $34 million marking year-over-year growth of 17%. Third quarter subscription revenue which makes up approximately 90% of our total revenue was $30.1 million. This is an increase of 15% from a year ago and 7% growth on an organic basis. Excluding the non-cash deferred revenue adjustments from 2022. Our advisory and other revenue was $3.9 million, an increase of $1 million year-over-year. We exited Q3 with run rate revenue of $138 million in total marketing 14% year-over-year growth. On an organic basis run rate revenue was $129 million, reflecting 7% growth on a pro forma basis as defined in a press release. NRR or Net Revenue Retention for the quarter was approximately 100%. A sequential quarter increase of 200 basis points in a year-over-year increase of 100 basis points. Let me provide some more details here because it is important to see the traction among our various customer groups. As you know, we have three primary customer groups we serve. Public sector, not for profit associations, and enterprises. As we said enterprise is our largest customer group, and large enterprise and strategic accounts represent the fastest growing highest NRR customers. And that has been the impetus for some of the changes we've made to our sales organization to capitalize on this underlying demand, and to extend our growth in large enterprises. This quarter reinforced this is the right strategy. NRR rates among our large enterprise corporate customers continues to trend above the company average. Demand for our regulatory and policy…

[Operator Instructions] The first question from the line of Matt Van Vliet with BTIG.

Yes, good morning. Thanks for taking the question. I guess first on the sales opportunity, not just in the fourth quarter, but maybe as we look out into 2024. And I guess sort of two factors there. One, what's the sales realignment doing in terms of driving more upsell, cross sell. Anything from an actual process standpoint that you've put in? And then as we think about sort of the maturity of that sales team, especially at the larger enterprise accounts, where are we in terms of sort of reps fully ramped? Or what's the mix of fully ramped? And then secondarily on that, where are you seeing the biggest impacts from the macro in terms of feedback from customers? And how is that impacting I guess, either deal flow, or maybe deal sizes?

Hey, Matt, this is Josh Resnick, I can address that. So in terms of upsell, cross sell opportunities, part of what we've been doing with the sales realignment has been adjusting the staffing responsibilities, quota setting, commission plans, and such to align around upsell and cross sell and have in fact established team that is focused specifically on upsell and cross sell because we do see significant opportunity up there. Especially when it comes to large enterprise clients. The team has gone through significant restructuring over the course of the year, we've been viewing that as an optimization of our approach to go-to-market, both in terms of how we structure the teams, but also in terms of overall the quality of the talent that we have in those teams. And as well as our effectiveness, efficiency and speed in ramping new talent as we bring talent on board and continuing to build a pipeline of talent across the board that we can use to continue as we continue our growth down the road. And in terms of the macro impact, I would say we are still seeing strong demand for the products, we have a lot of confidence in our pipelines, including in regards to some of the new products that we've launched, such as Risk Connector, where we tend to see an impact really is on sales cycles. And really the time to bring those home as, as prospects see budget pressure internally.

Okay, very helpful. And then can you just remind us as we look at the guidance, I think you mentioned that on the one time that's certainly being impacted by some of the products sunsetting and winding down of the underperforming products. But can you help us in terms of what the impact is on the subscription line limiting the growth there that maybe we were previously expecting? And then how that's maybe balanced with the success of the better products, especially around the regulatory and policy data? Thanks.

Sure, Matt. So yes, as you noted, lower non-subscription so one time revenue, certainly played a large role in what we're seeing. Second half is typically strong for one time revenue. And that hasn't materialized this year, due to largely due to budget uncertainty related to the macro. On the ARR subscription side, we have seen some slower pipeline conversion, like I was saying, and especially as we move to larger enterprise deals where the sales cycle naturally is longer again, the macro is going to have an impact there.

Your next question comes from the line of Mike Latimore with Northland Capital Markets.

Great, thanks very much. Good morning. Yes, congrats on the positive EBITDA and sequential change was pretty impressive there, gross margin that seems to be at a record level and was also up sequentially. Can you just sort of describe the impacts there? Was this kind of de-emphasizing some of the lower value products? Is this sustainable? Just little more color on gross margin would be great.

Mike, I think we will continue to see the gross margins stay pretty consistent. We saw some benefits from some creditors this quarter that I don't think we'll be continuing to repeat quarter-over-quarter. So in terms of thinking about going forward, 80% adjusted gross margin numbers probably the right way to think about it.

Got it. Great and then on the just kind of some of the vertical effects here, the federal government vertical, have you seen any kind of nuances there that were unexpected?

Iin terms of revenue?

Bookings primarily and --

Okay. We got through a major, Josh, you might want to handle that. But we've done contingency planning around it as we think about guidance for the upcoming quarter. But sure, yes, go ahead.

Sorry. Yes. Mike, this, Josh, I would say it largely continues to be steady federal government tends to be a good steady revenue driver for us. We've seen some impact from budget pressures in the federal government not surprising given the atmosphere on Capitol Hill, but still largely remained steady.

Okay. And then the comment about this is the opportunity to kind of re-accelerate growth is the implication there that you would try to maintain current EBITDA margins while you reaccelerate growth? Or how do you think about balancing those two?

Mike, we will continue to drive the margin. We're not giving any guidance with regards to 2024 at this time, but our operating plan will continue to push the company towards a more normal, industry normal and above operating and EBITDA margin over time.

Your next question comes from the line of Zach Cummins with B. Riley.

Yes. Thanks. Good morning. And also congrats on the inflection to positive adjusted EBITDA in the quarter. In terms of I know, you're not giving formal 22024 guidance, but just given the updated run-rate revenue outlook, is that sort of a good baseline to start from once we think about setting expectations for 2024.

Thanks for question, Zach. Yes, that's why we give the run-rate guidance, I think it's a good way to kind of start your modeling for the beginning of the year, and then kind of look at any updates we give further in years, as we see how we're gaining traction or other events that would drive the number north of that level.

Got it. And in terms of the cash balance, I mean, Jon, can you give an update on is there any one time items impacting overall cash burn in this quarter? And any sort of update you can give on expectations for cash burn in Q4?

So our interest expense and CapEx tend to be around $7 million per quarter. I think that's kind of when we think about beyond the adjusted EBITDA how to think about that. The fourth quarter tends to be the lowest point of our year in terms of cash, we're not giving specific guidance around what we think the yearend cash balance will be. And then we begin to see very strong cash collections going into the first quarter of each year. So we expect to see the bounce kind of building back up as we move into the first quarter. But we model it, we plan around it that the actions we've taken to date have all been done in light of cash requirements and maintaining the liquidity. We need to keep the business where it needs to be.

Got it. And final question is really around, I believe you're expecting a bounce back and the cash balance in Q1 of next year. Is that assuming that you're going to start consistently generating positive cash flow from Q1 and beyond next year? Or is it more of just the strong collections to start the year and maybe it'll take a little more time to get to a consistent free cash flow generation.

So there is a seasonality to our business and Zach, where we generate significant kind of positive cash flow in the first quarter because of the amount of sales activity that takes place in the fourth quarter and the billing and collection cycle off of that. From a from an income statement standpoint, we will be moving towards free cash flow from EBITDA standpoint relative to our fixed charges, but haven't given guidance as to when we cross over that, but it's certainly a focus of ours as we move forward to get to that level.

Your next question comes from the line of Rudy Kessinger with D.A. Davidson.

Hey guys, thanks for taking my questions. So the trend the last few quarters has been revenue come in below the midpoint of guidance and the forward revenue outlook being lowered. And Jon, I know last quarter, you said you guys were assuming similar close rates in the second half of this year, as you've seen in prior years. And so with this lowered revenue outlook, just could you comment specifically on your assumptions for Q4, as relates to close rates, renewals, expansions, et cetera, relative to past years?

Hey, Rudy. This is Josh, I can tell you, and I'll reiterate that the biggest impact came from lower non-subscription revenue where typically we would have expected better results seasonally in the second half, and we didn't see that come through, largely due to budget uncertainty, some underperforming products. And then on the ARR side, it's been slower pipeline conversion than we typically see. And so like I said, as we move to larger enterprise deals in Tennessee, longer sales cycles, which is fine. But we saw an impact largely due to the macro in the second half and conditions worsening in the second half.

Sure. And, Rudy, as it relates to guidance for the remainder of the year, we've taken into consideration the close rates that Josh referenced in the slower pacing into that guidance. And that's why we adjusted the revenue figure down for the quarter, we've reviewed the pipeline and looked at it in light of the conversion rates that we're actually seeing, and that's why we took the adjustment that we did.

Okay, and then I hear, I guess what you're saying on the Q1 cash bounce back given changes in net working capital, but with, I think, roughly $7 million a quarter in cash interest expense. I guess just what level of annualized EBITDA do you need to get to be free cash flow, breakeven to positive on an annual basis.

So our cash interest expense to be clear a little bit over $5 million and then our capital expenditures are between $1 million and $2 million per quarter generally. And that's the reference to $7 million. You could annualize that and kind of back into the number we would need to get to be truly free cash flow positive on a standalone basis.

Your next question comes from the line of Mike Albanese with E.F. Hutton.

Yes, good morning, guys. Thanks for taking my question. And nice quarter given some of the macro headwinds and lengthening of the sales cycle, I just want to get an update on the AI front and how you guys are utilizing technology. And really, if you're seeing any green shoots improving efficiencies across the organization. And I guess specifically, where are you pulling out annual synergies? Thanks.

Yes, no, thanks for the question. So I think that a couple of different things. So the first thing that we pointed out to you today on the call was the progression of some of the products that we have in the market, namely Risk Connector and some of the traction we're seeing there. That was a complete, wholly built in-house product that we kind of went out to market with to go after this sort of supply chain market and the like. In the second half of my earnings call I basically talked about some of the new initiatives that we're launching here in the market. And I guess what I would say is that the generative AI market in general has started to coalesce around the type of product and type of go-to-market that is somewhat different from what we've kind of gone to market with traditionally, if you look at very recent product lines from Microsoft, or from kind of growth oriented startups and like, a lot of the product lines that we're seeing are coalescing around called per user pricing of $50 to $200, a month per user, and then pricing very, very targeted generative AI capabilities for those customer sets. And so essentially, what I talked about is that over the course next couple of weeks, our intention is to implement similar kind of Co-Pilot strategy for the legal and regulatory space, to essentially take the data that we have embedded within kind of generative AI capabilities, and then help lawyers, legal professionals, regulatory professionals, draft documents, create legislation, create laws where the case is, and then effectively charged in a similar price point several $100 a month per user, such that people could essentially go out there and swipe a credit card and, and go-to-market very quickly. And so, what that effectively means that we've been in development with a series of these Co-Pilot products for some time now, and we expect that actually in a different go-to-market channel, different from a heavy enterprise sales model, that we're going to try and go with a more product led growth kind of user driven model here to drive faster revenue generation and kind of really lead into generative AI market a lot more aggressively. So we are seeing pretty good traction overall. And I think that's something that we're going to continue to monitor as we try to accelerate the growth of business.

There are no further questions at this time. I will turn the call back to CEO, Tim Hwang for closing remarks.

Yes, appreciate everybody taking the call here and definitely looking forward to another great quarter. Thank you everybody.

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.