Good morning. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the FiscalNote Fourth Quarter and Full Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I will now turn the conference to Buda, Vice President of Investor Relations. Sara, you may begin.

Hi, everybody. Welcome to the FiscalNote Investor 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 are rather 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 important factors that could affect our actual results, please refer to our SEC filings available on the SEC 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 or KPIs will be discussed on this conference call. Please refer to the tables in our earnings release and the Investor Relations portion 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.

Thanks, Sara. Thank you for joining us this morning. On today's call, we'll review our fourth quarter and full year results for 2023. We will also offer perspective on our strengthened balance sheet position with the recent divestiture of one of our noncore businesses which underscores our focused product strategy and our commitment to driving a strong return on invested capital. This transaction, combined with our achievement of adjusted EBITDA profitability in Q3, one quarter earlier than we initially forecast. Our beat of adjusted EBITDA expectations in the fourth quarter from the base of a transformational 2023 for FiscalNote. In addition to hearing from Jon and me, we'll also hear from our President and COO, Josh Resnik, who will discuss our priorities for 2024. First, let me remind you of some of the core funds of FiscalNote. We're on a mission to help our customers make sense of the complicated constantly changing world we live in by delivering a proprietary AI-enabled platform that aggregates and organizes regulatory, political and macroeconomic information and analyze the impacts on their organizations. We are the market-leading AI platform for the regulatory policy and geopolitical intelligence sector, essentially the Bloomberg Terminal for regulatory and public policy risk. We operate in a large and growing $40 billion addressable markets, driven by increasing geopolitical uncertainty and real complexity that impacts almost every organization, from government and nonprofit organizations to large enterprises who operate globally in a highly regulated environment. We have a strong and enduring competitive mote underpinned by our decade-long investment in data, AI and human intelligence. Our AI leadership is supported by a deep portfolio and is recognized by the world's most preeminent AI platforms. We are passionate about our customer success, thousands of organizations ranging from government agencies and public sector organizations to major…

Thank you, Tim. I'm delighted to be here. From an operating perspective, 2023 was a significant and positive change as we transform the organization and eliminate approximately $25 million in annualized expense and brought the Company to adjusted EBITDA profitability. As Tim mentioned, throughout last year, considerable management time and attention was placed on this goal as every member of our leadership team and our operating teams, we're relentlessly focused on driving costs out of the business. This impacted every area of our operations. Every manager, team member was clear on our priority and tackled it with incredible tenacity. And I want to take the moment to thank our teams for their rigor and dedication in making it happen and for doing it one quarter sooner than forecast. But profitability wasn't just an end in itself. All that work resulted in an efficient operating model that we're building on in order to drive sustained profitable growth for the long term. And as we enter 2024, and even as we continue to operate profitably, we're returning our focus to growth. We fully expect to achieve $250 million in organic run rate revenue within the next five years and we will apply the same relentless focus and determination that we used to deliver adjusted EBITDA profitability to drive that level of sustained profitable growth for the future. In light of that, let me tell you how the work we did in 2023 is impacting this year and what it means going forward. First, I'll tell you about the transformation of our commercial organization. In 2023, after bringing on our new Chief Revenue Officer, Richard Henderson, we made significant changes to our sales operating model, including implementing aggressive performance management measures and adjusting our coverage model. This has resulted in a leaner, more…

Thank you, Josh. And let me start off by highlighting some notable achievements over the past few months. In 2023, management brought the business to adjusted EBITDA profitability in just two quarters. Q4 versus Q1 represented a 31-point margin improvement resulting in a go-forward business with extremely strong operating leverage and FiscalNote divested a noncore business, resulting in a radically improved balance sheet with lower debt, higher cash and lower interest expense. Overall, I'm delighted with our position today and the growth opportunities as we move forward. Now let me run through our Q4 and 2023 results as reported including the Board.org divestiture, the impact of certain sunset products and provide a view of the upcoming you, I'll start with revenue. Fourth quarter revenue was $34.3 million, marking 9% growth year-over-year in total and 1% on an organic basis. Full year 2023 revenue was $132.6 million, marking 17% growth year-over-year in total and 7% growth on an organic basis. Revenue growth for Q4 and for the full year was negatively impacted by underperformance in our non-subscription project-based revenue. Non-subscription revenue, which accounts for about 10% of total revenue was essentially flat for the full year and declined by about $1 million in Q4, as we pointed out in our last call. Conversely, our recurring subscription revenue, which makes up 90% of our total revenue remains solid. Subscription revenue grew 14% in Q4, 7% organically and 18% for the full year, 9% organically. We exited 2023 with run rate revenue of $140 million, marking 10% year-over-year growth in total. On an organic basis, run rate revenue was $130 million, reflecting 4% growth on a pro forma basis as defined in our press release. We grew our total annual recurring revenue, or ARR, to $126 million as of December 31, an increase…

[Operator Instructions]. Your first question comes from the line of Mike Latimore from Northland Capital Markets. Please go ahead.

All right. Yes. Thanks very much. Congrats on the strong EBITDA results and that the valuation here on the Board.org sales, right? As you think about -- if you think about NRR for the year, are you assuming NRR kind of stays where it's been? Or do you expect some change in that number and if so, why?

Mike, thanks. This is Josh. We do expect NRR rate to improve over the course of the year. So, you should see improvements starting in the second half. We've got expansive cross-sell opportunity across our core business and expect to see a lot of the changes that we talked about earlier that we put in place really start to pick up over the course of the year.

Got it. And then it sounds like also important for growth will be your strategic account initiative coming to fruition. I mean, can you talk a little bit about kind of where that stands in terms of just the sales focus, the pipeline, how bookings have been trending, sales cycles in the kind of strategic segment?

Yes, sure thing. So, we definitely have a focus on strategic accounts. Generally speaking, we see a tremendous opportunity to increase through cross-sell and upsell to our largest relationships. We know we've seen that with a number of our larger accounts. And our team is really focused on doing full account-by-account analysis for white space and green space to really drive that growth this year, and we're excited about the pipeline that we have. There's been -- over the course of 2023, you know there were macro pressures that we've talked about that impacted sales cycles, especially on the larger accounts. But we expect to see a lot of our efforts bear-fruit there this year.

Great. And then just last one on the Co-pilot strategy. How much kind of effort are you going to put behind that? Is that a big focus from a marketing perspective? And just remind us on the kind of pricing and revenue dynamics there?

Yes. So, the Co-pilot strategy for us is quite a large strategy in terms of being able to leverage the existing data and content that we have and packaging it into a new go-to-market strategy that's more aligned with how a lot of AI companies are going to market today. And so, you'll kind of hear from us over the course of the next couple of weeks as we go out and really launch a series of these Co-pilot into the market. But just imagine all the stuff that we're working on with respect to our legislative regulatory data and then, of course, how we're packaging that and then the workflow automation tools that we're coming to market with an accelerated basis. So, we'll have some more information as we come out in the next few weeks.

Your next question comes from the line of Richard Baldry from Roth MKM. Please go ahead.

Wondering, as you go through your strategic review, are there any other products that see more stand-alone left-oriented a cross-sell, upsell that you'd be considering divesting?

Hi, Rich, it's Jon. We aren't presently evaluating other individual products for divestiture right now. We continue to monitor the portfolio but have no plans to do this. This was kind of a situation where we were approached by someone who saw strategic value in the asset and it made sense to us no plans.

Okay. And then with the balance sheet stepped up the way it has been, can you talk about your own willingness now to continue to pursue maybe tuck-in acquisitions on a go-forward or near basis?

Absolutely. The corporate development team has been hard at work, maintaining active dialogues and discussions with acquisition targets that would be strategic tuck-ins, kind of on the smaller side for our core lines of business. I mean, we refocus, we'll spend a lot of time evaluating those opportunities in an acquisition and partnership standpoint. The execution really the timing of the execution will depend on a number of things, including kind of valuations in the marketplace, our stock price and the ability of us to engage effectively with prospective sellers.

Okay. And a lot of people spend a lot time on AI and sell it to other people, but I also think it's important to kind of understand what it can do internally in terms of cost or cost leverage sort of intermediate term, long term? Specifically, for you guys, do you think it has an ability to help you on the editorial side? Are there ways you can bring it in-house to get you better leverage long term?

Sure. This is Josh. I can address that. So yes, we're absolutely looking at how we leverage AI for internal tooling. We've been actually deploying it across teams for some time now. We continue to get efficiencies out of it and expect to get more efficiencies over time. And that's just part of the reason why we feel very good about our cost base going forward even as we accelerate growth.

And two last small ones, but you're talking about where you think the direction of the nonrecurring revenues should go sort of near term or long term that's come down a little bit in the current quarter, center break some trending.

That's mostly seasonality and we did see projects kind of defer at the end of last year, which had an impact on how we finished out the year. Historically, it's been about 10% of the revenue, and that feels like the right number going forward, but it could fluctuate up or down just depending on where we gain traction and it's how our enterprise clients want to engage with this special use case for scenario planning and whatnot.

Last maybe, when you think about the rebound to accelerating growth, are there metrics internally that sort of maybe we can't see like ARPU or cohort analysis, sales tenure duration sort of number stepping up that give you that confidence or the pipeline you're actually seeing? Just anything that sort of makes that more concrete for us.

Yes, sure. I mean, there's a ton of metrics that we look at internally as we track across our products and our various sales pipelines. And we look down to account levels, as I mentioned, for example, with regard to our strategic accounts that we're doing an account-by-account look at where the whitespace and greenspace is for expansion. And we're really doing that across the board. So, we look at that, both for new logo as well as for retention and cross-sell, upsell. There's a lot that we look at very deep in the business to understand where the pipeline is going and where we have the best opportunity to move the needle the quickest. That's what the teams are doing every day.

Great. And congrats on the divestiture. It looks like it moves a lot of dials in the Company.

Your next question comes from the line of Rudy Kessinger from D.A. Davidson. Please go ahead.

I'll have my congrats on the sale, a very great return on that business and help piece the balance sheet a bit here. I guess just on some of these go-to-market changes and realignments, I know you, guys, had first started talking about these changes more of a focus on strategic and enterprise about six months ago now. And so, when do you expect the change really to start to have an effect and result in greater sales productivity and higher levels of growth? Should we expect that first part of this year, second half of this year and not until next year? Just what are your thoughts on that?

Sure, Rudy. Yes. So, we've been implementing changes over time, and we're seeing them take root and then expand them across the full organization. So, one example, as I mentioned in my remarks, were some changes we made to coverage across our customer success and management functions across certain parts of the business. We saw success in the form of reduced cost to serve as well as improvements in retention. And so, we're in that model and expanding that through the rest of the business. We've been stage-gating it both to make sure that we can make the right progress but also for change management throughout the organization and also trying to time that as well as possible given the various sales cycles and the like. And so, you should start to see those changes and others take over the course of the year and really reflect in second half growth this year and then heading of course, in 2025.

Okay. Jon, then I've got two questions for you. Firstly, the Company's results just in terms of top line performance, generally since the [indescribable] [Ds-back] process, kind of in line to slightly below your quarterly revenue guidance. And so, when we think about the Q1 guide, the full year guide for this year, should we think of your guidance philosophy being roughly similar to have been in the past? Or is there anything in the guide where you're trying to be more conservative in terms of close rates and pipeline conversion, et cetera?

It's a good question, Rudy. And look, we reserve in the same trend as well. And we tried to guidance this year where we felt like we can meet and exceed consensus and be closer to the top end of the range, hopefully, have an opportunity to update you later in the year with good news. We certainly fully confident in the first quarter. At this point in the quarter, we have a lot of visibility to that. And we'll provide more kind of more robust details as we roll out next quarter and report for quarter and give you kind of guidance towards second and third.

Okay. And then just lastly, on free cash flow, I know you're not giving cash flow guidance, but $8 million EBITDA at the midpoint, $9.5 million cash interest, I believe you've said in the past $4 million, $8 million CapEx. It would seem, assuming no changes in net working capital and potentially with some stronger bookings in the second you get a positive boost there. But it seems like the business this year should earn probably high single digits to low double digits in free cash flow. Is that math roughly accurate?

I think that's right to potentially a little bit lower, but right around $9 million to $12 million is probably a good number. If you think about our cash interest expense and our CapEx really hasn't changed as a result of the Board.org divestiture. So, our fixed charges in that capacity was somewhere in the neighborhood of kind of maybe 18 to 20, 18 to 21. But depending on how we track from an EBITDA standpoint that kind of defines it in the -- as you described it. And we certainly have the cash on the balance sheet to fund that for the year. And as we expect continue to progressively increase revenue and adjusted EBITDA, we'll be pacing towards being free cash flow positive, and we'll give you more kind of insights on that as we progress through the year.

Okay. Congrats again, it looks like a very good tail here.

Your next question comes from the line of Zach Cummins from B. Riley Series. Please go ahead.

Congrats again on the very successful sale of Board.org. Josh, I wanted to dig a little bit deeper into some of the changes that you made, your customer success and retention teams. But I mean, can you talk about, I dig a little bit deeper into the changes that you made with that specific team and how far along you are in terms of rolling that out to the rest of the teams.

Sure. I can go into some level of detail. I mean the most important is making sure that we have the right focus from those teams in terms of coverage models against our accounts as well as having the right strategies in place for cross-sell and upsell. So -- and we -- most significant is we put some changes in the earlier part of last year, so around this time last year. As I mentioned, we saw our ability to do greater coverage. It included refining our approach by size of count, automating more for smaller accounts and putting a greater focus on our larger accounts which helped with both the cost basis and, as I said, with our actual retention results. And then, we implemented that across our geopolitical business towards the mid-Q4 of 2023. And so, that's where we expect to see similar improvements across the board over the course of the rest of the business as this year goes on.

Got it. Understood. And just curious, in terms of what you're hearing from customers in terms of buying patterns, I know it was pretty challenging throughout 2023. Just curious if that has changed a little bit since you've turned the page into a new year. And I guess, just a subset of that question. Does the fact that it's an upcoming election year have any sort of impact in terms of customer or potential customer demand you could see?

Sure. So, generally speaking on the macro, I would say buying sentiment is, I would say, has been on the whole better this quarter. Still on conservatism out there, so not fully seeing a return to past patterns yet. But we're -- some people are still wait and see, but we're optimistic for the year. And then in terms of election and impact on sales cycle, elections and -- it's a massive election year globally and that does drive greater -- we see greater engagement with our products, generally speaking, around election coverage. So generally speaking, that can drive demand. And as long as the macro isn't negatively impacted so that you don't see budgets tremendously negatively impacted. That can be a help for us from a sales perspective.

Your next question comes from the line of Mike Albanese from EF Hutton. Please go ahead.

Nice job on the quarter. Just a quick one for me. I want to go back to kind of your infrastructure, I guess, cost structure. You've done a nice job reducing cost, I think, to the tune of $20 million, $25 million over the last year. I mean, we're through this, we're kind of through the cost and then you could take out that you kind of guide market while you were doing these initiatives. Are we kind of through that now? Is there still more low-hanging fruit that you can take out? I know someone asked a question about AI and kind of finding operational efficiency through that. I'm sure that there's some more cost you can identify and take out. But just as we go back to the original restructuring that you had discussed, is that behind us now? Or is there still more to take out as we look into 2024?

Yes, sure, Mike. I would say the bulk of that is behind us. We're all where we want to be from a cost perspective and a structure perspective. We're always going to be improving and shifting as an organization as any organization would as we see the opportunity to leverage AI internally to drive more activity and automation over time, too. And so -- and we'll always be finding ways to optimize throughout the organization. But for the most part in terms of where you're getting at kind of the bulk of those cost initiatives, we've worked our way through that and expect to grow from here while staying relatively consistent from a cost perspective.

Got it. Great. Okay. And then I guess just a follow-up to that. As we think about looking out into next year in 2025, I think you can get back to double-digit revenue growth. I mean how can we think of the organic growth in your cost structure as you're adding revenue and cross-selling. I mean just generally, again, what you're saying that you've kind of reached a level that you can really generate the operating leverage from here, but I'm sure there's some incremental increases as you grow. How can we think about that?

Sure, Mike. Adding on to Josh's comments about cost savings. I think as we think about it, R&D content and G&A expenses are relatively fixed at this point. I think we've got a lot of operational leverage out of the cost structure there. There may be opportunities to trim expenses here and there as we move forward. But -- and then, we do see some potential improvements in gross margins down the road, but not dramatically. I think that's good number to keep in your model. And then our sales and marketing costs will increase as we go forward and increase revenue, not dollar for dollar or proportionally, but we will see some increases in the cost to drive that revenue going forward. So, as we're situated, I think we have a lot of operating leverage on incremental revenue.

We have no further questions in our queue at this time. I will now turn the call back over to Tim Hwang for closing remarks.

Great. Thank you, everybody, for jumping on this call and feel to reach out if you have any additional questions. Thank you so much.

Thank you so much. This concludes today's conference call. Thank you for your participation, and you may now disconnect.