Good morning. My name is Aaron, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the FiscalNote First Quarter 2024 Financial Results Conference Call. [Operator Instructions] With that, we can now begin today's call. I would like to turn it over to [Technical Difficulty].

Good morning. My name is Bob Burrows. I'm with Western Avenue Advisers LLC, which was hired in April as an Investor Relations Consultant to the company following Sara Buda's recent departure. I look forward to speaking to and being a resource for the company's investor stakeholders in the days, weeks and months ahead. Thank you all for joining the call today as we discuss FiscalNote's first quarter of 2024 financial results. With me on today's call with prepared comments are Tim Hwang, Chairman, CEO and Co-Founder and Jon Slabaugh, CFO and Chief Investment Officer. Other members of the senior management team will be available during the Q&A session that will follow these prepared comments. Please note a slide deck specific to the first quarter 2024 results and intended as a supplement to the earnings release, as well as the forthcoming prepared comments from management is available on the company website. In terms of important housekeeping, it is important to mention the following. 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, as well as the risks and other important factors discussed in today's earnings release, please refer to our SEC filings, which are available either on our company website or the Securities and Exchange Commission's EDGAR system. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release or the accompanying slide deck for this call, both of which are available on the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measures. Finally, we use key performance indicators or KPIs in evaluating the performance of our business. These include run rate revenue or RRR, annual recurring revenue or ARR and net retention revenue. Again, please refer to the earnings release or the company's slide deck for this call for definitions of these important metrics. And with that, I'd like to turn the call over to FiscalNote's Chairman, CEO and Co-Founder, Tim Hwang. Tim?

Thank you, Bob, for that introduction, and thank you all for joining us this morning. It's great to be with you today to discuss our first quarter 2024 results and to provide an update on the state of our overall business. We will also offer some perspective on our strength and balance sheet position and profitable growth with the recent divestiture of a non-core business as well as elaborate on our product strategy and our commitment to driving strong return on invested capital. I always look forward to this opportunity to connect with our shareholders and share with you the exciting developments of FiscalNote. First, let me remind you of some of the core fundamentals of FiscalNote. We're on a mission to help our customers make sense of the complicated and 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, legislative policy and geopolitical intelligence sectors. Essentially, the Bloomberg Terminal for regulatory, legislative and strategic risk, drawing upon a deep reservoir of technical expertise, proprietary data and analytical tools. Our proprietary high-quality and authoritative data on a range of aspects include international, federal, state and local legislation across 80,000 cities, all 50 states and every major federal regulatory agency, as well as deep profiles of tens of thousands policymakers, millions of legislative and regulatory votes and purpose built analytical tools monitoring governments around the world that have enabled FiscalNote to build a market leading position across thousands of customers. Many of our assets, including CQ, serve essentially as the Dow Jones of legislative and policy worlds, providing deep domain expertise with proprietary data. CQ, as an example, has been providing Washington…

Thank you, Tim. My comments this morning will be brief, so let me jump right in and walk through the numbers for Q1 2024, starting with the income statement. Looking at revenues, total revenue for Q1 2024 was $32.1 million, slightly higher than the prior-year period. Subscription revenue during the quarter accounted for 92% of revenue, in line with the company's historical trends. Digging deeper into revenue, with respect to our key performance metrics, we experienced some comparison challenges this quarter due to the divestiture of Board.org. In Q1 2024, run-rate revenue was $122 million, and annual recurring revenue was $110 million. On a pro forma basis, adjusting for the impact of the Board.org divestiture, both metrics for Q1 '24 were higher than the prior-year period. And in Q1 '24, net revenue retention was 96%, a similar level to the prior year. Overall, revenue performance in the quarter reflects increases from organic growth and acquisitions during the prior 12 months, offset by decreases resulting from both dispositions and product discontinuations. Turning to expenses, principal operating expenses in Q1 2024 decreased versus the prior year. Specifically, the cost of revenue decreased by approximately $2 million or 19%. R&D decreased by approximately $2 million or 32%. Sales and marketing decreased by approximately $3 million or 23%, and G&A decreased by approximately $2 million or 12%. Generally speaking, the reductions in operating expenses principally reflect cost control measures instituted across 2023 as well as the impact of the sale of Board.org in sunset products. Looking at our profitability during the quarter, let's start above the line. Gross margins remained strong in the quarter with Q1 2024 coming in at 77% on a GAAP basis and 85% on an adjusted basis, both increases over the prior-year period. These improvements will primarily reflect the impacts…

Our first question for today comes from the line of Tim Moore with EF Hutton.

This is [ Jesse Sobelson ] on for Tim Moore. I see you guys disclosed these annualized KPIs, but would you be able to disclose the revenue contribution from Board.org in the 2 months that it was part of your business last quarter as well as the cadence of the 13 or so million last year, so investors can calculate the organic revenue growth achieved and what is embedded in the forward guidance?

Sure, Jesse. Those will be disclosed when we file the Q. There'll be a bridge.

Our next question comes from the line of Matt VanVliet with BTIG. Your line is live.

Tim, you outlined a number of new initiatives, obviously, mostly around AI and a number of these Copilots. But how are you balancing the go-to-market approach, internally of sort of more and more products and, recently, somewhat reduced total force at the company? And just sort of how you can keep everyone focused in selling the appropriate products in this current headcount?

Yes. Well, why don't I start, and then I can have Josh kind of jump in afterwards as well. I think that from our perspective, what we view generative AI as is essential to delivering for our customers on an ongoing basis. And so, we eventually expect that all of our customers will be using some form of generative AI, whether it's incremental to our existing products or embedded in our existing products. And so, we're going product by product at the moment and deciding which product lines will need to have generative AI components embedded in their solutions to really deliver on the service, versus which solutions we need to essentially serve as a cross-sell or upsell. But it's important to remember that it's all the same thing, right? We're using the same data. We're developing these AI models on top of the same data that our customers are already subscribing to and trying to deliver incremental value from these solutions, right? So, just to go give you one example. You might have one customer who subscribes to all of our legislative information, trying to understand legislative data around the country or around the world. You know, currently, what they're doing is they're exporting that information into an Excel spreadsheet and then manually creating these reports and whatnot internally. So, the ability to add one-click report generation, for instance, is a tremendous value add for our existing customers. Now, whether we package that as a part of our existing solution or upsell that, I think they're sort of a more tactical decision. But, obviously, we see it as a transition point from our existing product lines. But, Josh, I don't know if there's anything else you want to add on your end.

Sure, Tim. Yes, Matt, I can just add a little more to it. So, holistically, one way to think about it is we've spent a lot of time refining our product portfolio overall, making sure that we're investing in the right products that are going to drive sustained and profitable growth. And as we layer in new product offerings and we've created ourselves more room to be doing that because of that past refinement of the portfolio. In addition, on the last call, I talked a lot about improvements that we've made over the past year to our commercial organization, how we've been able to drive greater performance and productivity as we've restructured the teams and made other changes. So, that gives us greater capacity to do more even as we've reduced our operating expenses over time. In addition, we're very focused now on transformation of our overall product portfolio and shifting more to product-led growth as Tim talked about. And that creates the opportunity to be launching newer products, be it Copilots, AI agents, or other products, into the portfolio and be more efficient in terms of how we drive that go-to-market going forward.

Okay. Helpful. And then have you explored the opportunity to -- given the advancements you've made around AI, and I think you're definitely on the leading edge here relative to a lot of other companies. But looking to go as more of a partner model, maybe even an embedded type of channel in larger technology stacks where you're powering a lot of the Copilot features but aren't required to do all of the direct selling, what kind of opportunities do you think might be out there for that? And maybe what's holding you back from pursuing those?

Yes. So, I mentioned in the comments that we've been approached and have approached a number of players in the market essentially doing exactly that strategy. And so, maybe I can sort of lay out 2 or 3 different types of partners that we're speaking to at the moment. One, including existing and kind of new and up-and-coming large language model companies that have cut data licensing or similar deals in terms of embedding some of the solutions into their existing language models and the like. Second, I would say, are sort of service companies. So, these are companies that are going out there that are implementing generative AI within enterprises today that can leverage FiscalNote's number of solutions that are out there. And then third, I would say are point solution companies or other information services providers that may want to leverage different parts of our technology stack to enhance their existing product offerings. So, we mentioned StressLens and earnings call transcript providers or PR agencies that are using our technologies for media training and others. So, we're taking a fairly wide view here in terms of looking at embedding our solutions into other technology partners overall.

Okay. Very helpful. And maybe one more, Jon, if I can. Obviously, the sale of Board.org has given you a little bit more capital and flexibility. But talk of this kind of creating a Copilot Creator that should accelerate product development, how is that impacting kind of the puts and takes around the M&A strategy as you look ahead over the next several years? Is there still a need to sort of buy into various markets? Or do you feel like you have the technology now that you can quickly get to market with new demand that's in the market?

Sure, Matt. I think that as we think about the M&A strategy, it's -- we've slowed down. But primarily, that had to do with those focusing on continuing to integrate the existing acquisitions or the previous acquisitions we made and continue to drive opportunities there. But the market has a lot of consolidation opportunities for us to continue to integrate additional data sets that will be added to our overall value proposition down the road. And we're just kind of waiting for -- we're going to be looking at value relative to our own valuation right now and liquidity and balancing organic growth versus inorganic growth. But it's not -- I think we still continue to do acquisition when the time is right.

[Operator Instructions] Our next question is from the line of Zach Cummins with B. Riley Securities.

Tim, I really wanted to ask around what's given you the confidence that we could see an acceleration in overall bookings in the second half of this year? Obviously, you've made a lot of changes in terms of the operational theme. Just curious of what you're seeing in terms of pipelines and maybe just incremental conversations with larger enterprises on that side.

Yes. I mean, so I think that we track our pipelines quite closely throughout the years. And so, from our perspective, we are seeing the pipeline that we need to sort of see the acceleration that we want, particularly on the enterprise front. But I think in combination with that, a lot of the changes that Josh had talked about, including the sales force realignments that we did last year that are placing a lot more of a heavy focus on large enterprises, that combined with the product enhancements and the bundling that we're talking about today, should drive the acceleration that we're looking for. But in addition to that, of course, there's a number of different initiatives inside the company that I laid out in the earnings call that we also sort of see potential upside there as well. So, I guess, Josh, do you want to kind of jump in here as well with some additional commentary?

Sure, Tim. Yes. I mean, I'll just to echo what Tim just said, we're seeing success where we've put in place these go-to-market and commercial changes throughout the organization. So, as we see them take root, we're seeing the benefits play out in different areas. And so, as I mentioned on the last call, where we have seen those, some of those that have been placed for some time, we put some more recently in place in Q4 last year that we have confidence will bear out in the second half of this year. So, where we look very deep in the metrics, we're seeing that progress start to take place. And then we're seeing -- just generally speaking, we're seeing good movement in terms of ACVs and the direction we want to see that go as well. And so, those to us are really good indicators of where we see the business heading in the second half of this year.

Understood. And one follow-up is just really around adoption of your new AI products. Really appreciate the deep dive into all the new solutions that you're rolling out into the market. But outside of some large partner, it seems like there's a great opportunity just to upsell some of these products to your existing enterprise base. So I'm just curious of how you're thinking about monetization, whether it be from within that base or continuing to broaden outside of that.

Yes. So, I think it just depends on the product line and what problems that we're solving for customers. So we launched, for instance, our geopolitical Copilot last week. And the expectation is that the rollout of the geopolitical Copilot will be to existing customers first. And we do see that as being a tremendous value driver not just in terms of driving new sales from a competitive perspective, but also driving better retention rates. That being said, I think when you look at other Copilots like StressLens or our up-and-coming kind of product road map, which we'll talk about probably at our AI product day in the next couple weeks, we're taking, in certain cases, choices to create incremental modules to kind of find those upsell opportunities. So we're sort of taking it on a product-by-product basis and figuring out is this the retention play, is this the new sales play, is this an upsell and cross-sell play, and then trying to figure out the best pricing and go-to-market model from that.

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

This is [ Andres ] for Rudy. Good quarter overall. I just had a quick question. Regarding the total subscription clients that were down 300-ish, do you have any commentary about it? How much of that came from the divestiture, and how much was organic?

Can you say it one more time? The line broke up a little bit. I want to make sure I understood the question right.

Yes. I'm just asking about the total customer count, the subscription clients that was down 300 or around 300. Just asking about how much of that came from the divestiture, and how much was for something else. And if you could touch a little bit on that.

Okay. I think that really relates to the Board.org divestiture and the customers that were passed off to the buyer there. And we'll provide more details on that, like I said, in the Q when it gets filed.

[Operator Instructions] We have another question from the line of Mike Latimore with Northland Capital Markets.

This is [ Vijay Deva ] for Mike Latimore. So, I believe you have briefly commented upon the strategic review in your prepared remarks, but if you could elaborate a little bit more on the types of options that you are considering to realize shareholder value. And at the same time, you have quantified the synergies that a strategist might consider.

Yes. No, I appreciate the question. You know, at this time, we're not commenting further on the strategic review. I think the only thing that I would say is that we just divested an asset for 7x ARR -- LTM ARR. And we've said pretty much consistently in every earnings call that we believe that the company is dramatically undervalued relative to peer comps, relative to transaction multiples that are going on currently in the marketplace, relative to almost every major measure. And so, our Board sees that. I think we all see that. And we're prepared to obviously continue to review all options that are available to us to try and drive value for our shareholders.

And maybe I can sneak in a couple of other questions as well. On the sales cycles for new logos, do you see them shrinking with Copilots? And as well as how do you see sales cycle for the government versus enterprise, at the same time, new versus upsells? Kind of any characterization of the sales cycle here will be helpful for me.

So, sorry, I just want to make sure -- this is Josh. I just want to make sure I understood the question. This is a question about what we expect sales cycles to be for Copilots. Is that right?

Yes. And the same time, between the government and enterprise and new versus upsells. So, any characterization around all these various factors?

Sure. So, generally speaking, in regards to Copilots, as Tim mentioned, that's more of a product led growth model. So, you would see different sales cycles there than you would typically expect in something that might be a sales-led growth model and specifically focused on, say, enterprise and government. So, you would expect to see, generally speaking, shorter sales cycles. The nature of those would depend on kind of each product, the nature of the audience, and the type of engagement that you seek. But typically, for those, you'd see a model where someone has the opportunity to essentially try engage with the product in some way before they actually purchase. And so, it's a different nature of sales process and, generally, a more compressed sales cycle that you would expect to see. And I think the second part of the question relating to breakdown of sales cycles between government and enterprise, we typically don't break down the metrics to that degree.

Ladies and gentlemen, that will conclude our question-and-answer session here for today. I would like to turn it over back to Mr. Hwang for any closing comments.

Great. Thank you, everybody, for joining the call. As mentioned, we have an upcoming AI product day and some additional materials online for people to take a look at. So, appreciate everybody jumping on. And if there are any additional questions, feel free to reach out. Thank you very much.

And ladies and gentlemen, that will conclude today's FiscalNote first quarter 2024 financial results conference call. Have a great day. We'll talk to you later.