Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to FiscalNote Third Quarter 2024 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers remarks there will be a question-and-answer session. [Operator instructions] Thank you. I would now like to turn the conference over to the company. Please go ahead.

Good evening. My name is Bob Burrows, Founder and Principal of Western Avenue Advisors, LLC, an Investor Relations consultancy. I am Interim Investor Relations Officer for FiscalNote, having been hired by the company back in April following the departure of the former IRO. Thank you for joining the call today as we discuss FiscalNote's third quarter 2024 financial results as well as the additional news today regarding the announced leadership change for the company. With me on today's call with prepared comments are Tim Hwang, current Chairman, CEO and Co-Founder; Josh Resnik, current President and Chief Operating Officer; and Jon Slabaugh, CFO and Chief Investment Officer. Other members of the senior management team will be available as needed during the Q&A session that will follow these prepared comments. Please note, copies of today's press release, the current report on Form 10-Q for the quarter and the required current report on Form 8-K related to today's disclosures as well as an updated version of the corporate overview presentation are all 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 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 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 updated version of the corporate overview presentation, 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 measure. Finally, we use key performance indicators or KPIs in evaluating the performance of our business. These include run rate revenue, annual recurring revenue or ARR and net retention revenue or NRR. Again, please refer to the earnings release or the updated corporate deck for definitions of these important metrics. And with that, I'd like to turn the call over to ViscoNote's current Chairman, CEO and Co-Founder, Tim Hwang. Tim?

Thank you, Bob, for that introduction, and thank you all for joining us this evening. It's great to be with you today as we discuss a variety of items on the company, including our third quarter 2024 results, the state of our overall business and of course, the leadership transition also announced this evening. Given that change, I'll share my thoughts on the company I cofounded before turning the call over to Josh, who will provide an update on the state of the business. First, let me address the rationale for taking a step now to transition the leadership of the company to Josh starting January 1, 2025. When we set out more than 10 years ago in founding FiscalNote, our guiding principle and mission was to help 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 impact on their organizations overall. As of today and reflecting back over that time frame, that is exactly what we have done. Back then, applying machine learning and big data analytics to test the laws and regulations were just an inkling of an idea. Fast forward today, we are now living in what I believe will be one of the largest technology transformations in my generation. Today, we are the market-leading AI platform for the regulatory, legislative policy and geopolitical intelligence sectors. As you've heard from me many times, we are essentially the Bloomberg terminal for regulatory, legislative and strategic risk, drawing upon a deep reservoir of technical expertise, proprietary data and analytical tools. I take tremendous pride in knowing that we have amassed a collection of proprietary high-quality and authoritative data on a range of aspects, including international, federal, state…

Thank you, Tim, for those kind words and for your heartfelt views about the company. I want to thank everyone here for joining us this afternoon, and I look forward to discussing our third quarter results as well as what you can expect to see from us in the future. But first, I want to take a moment to address the change in Tim's role. Like a number of FiscalNote team members, I joined FiscalNote because of Tim. In the early part of his startup's lifespan, his success rests on the founder's shoulders. And from the moment I first met Tim and ongoing throughout my time working at FiscalNote with him, I've continued to be impressed by his unique qualities and skills, his vision, his creativity, his boldness and his commitment and in particular, his passion for FiscalNote, his understanding of our market and his relentless drive to achieve a successful return for all our shareholders. And that's why I'm so glad Tim isn't leaving FiscalNote and that he'll continue to work with us actively on strategy and other drivers of this next phase in the FiscalNote story. As for me, I've succeeded at both ends of the spectrum, including in senior roles at some of the world's largest companies as well as with hands-on experience with tech start-ups as an early hire, venture adviser and leader and mentor to founders and teams. So I bring a balanced perspective that supports growth and innovation at any scale. I'm looking forward to continuing to collaborate with Tim as each of us steps into our new role. With that, let me turn now to the state of the company with a focus on what we've done and what you can expect to see from FiscalNote going forward. Let me begin by first…

Thank you, Josh. My comments will be brief this afternoon. And given today's other news, I want to take a moment to congratulate Tim on his transition to Executive Chair. Tim's contribution as Founder, CEO and Chairman cannot be understated. Tim, it has been a pleasure working with you these past five years, and I look forward to continuing to collaborate with you in your new capacity. And Josh, I'm equally thrilled to continue our work together as you step into the CEO role and continue driving the next phase of profitable growth for FiscalNote. With that, let me turn to the quarterly performance, starting with the income statement. Total revenue for Q3 2024 was $29.4 million, in line with our forecast and lower than the prior year due primarily to the divestiture of Board.org. While down period-to-period, subscription revenue remains the cornerstone of our business, accounting for 93% of total revenue this quarter and in line with the company's historical trends. Looking at our key performance metrics. As of Q3 2024, run rate revenue was $119 million and annual recurring revenue was $109 million. On a pro forma basis, adjusting for the impact of the Board.org divestiture, current year run rate revenue is $5 million lower than the prior year third quarter, and ARR was level with prior year third quarter. And as of Q3 2024, Net revenue retention was 99%, slightly lower than the prior year. Turning to expenses. Principal operating expenses in Q3 2024 continued the trend of year-over-year decreases, reflecting the impact of cost-saving initiatives instituted last year, the Board.org divestiture and sunset products during the current year. Cost of revenues decreased by over $4 million or 40% due to certain technology-related amortization expenses in 2023 that did not recur in 2024. R&D decreased by $1.2…

Thank you. We will now begin the question-and-answer session. [Operator instructions] Your first question comes from the line of Jesse Sobelson with D. Boral Capital. Please go ahead.

Hi, everyone. Thanks for taking my questions. Congrats on the shift in the C-suite. It's a big move, and I think investors are going to be excited to see some changes in the business. I am curious, looking forward here, what -- in terms of the target capital structure over the medium term, we've sold some assets. We've improved profitability quite dramatically quite recently. What is the goal for the capital structure maybe on a net debt-to-EBITDA basis? And how do we get there from here? What's the vision over the medium term?

Thanks for the question, Jesse. It's Jon. And that's something that we spend a lot of time thinking about the right capital structure. As we said, we're still continuing to kind of evaluate that and other strategic moves we might make. The company has a good senior credit facility and subordinated debt as well. We're looking at ways to reduce our overall cost of capital and be able to service that with the cash flow that we plan to generate in subsequent years. So as we get into our budgeting and planning for the upcoming years, that will really be informative about kind of the right level of debt that the company can sustain long term. But I think we'll continue to try to find ways to deleverage and reduce the overall debt profile of the company. That will be a driver of the long-term equity value for the company.

Yes. Understood. I think just one quick follow-up for me. Just there's a lot of talk on the bigger picture on the business here. Just kind of drilling into specifics. One thing that I think a lot of people are really excited to hear about was this copilot program with AI being utilized. I was wondering, there were some pilots done earlier in the year. There's certainly been some progress there. Would you guys be able to elaborate on any customer reception with the new technologies that you guys are executing on, implementing with your product and any developments there, please? Thank you.

Sure, Jesse. This is Josh. I'll address that. So we launched two Copilots earlier this year. One is our Copilot for Policy, one is the Copilot for Global Intelligence. With the Copilot for Global Intelligence, that's essentially combined with the other aspects of our product experience, it gives our end users a new way to interact with our data and analysis and a way in which they can get to the heart of answers to their most pressing issues much more quickly. We've been really happy with the customer uptake that we've seen. We've seen a very, very broad uptake among our customer base. We're seeing a lot of good healthy metrics in terms of things like return visits, repeated -- kind of repeated inquiries, and we like actually the nature of the questions that we're seeing being asked. And we've also seen promise in terms of the potential that, that has to help drive upsell and cross-sell through product-led sales and product-led growth, which is important for us going forward as well. So a lot of good successes there, and we feel really good about that product and what it will be able to do to help drive us to more growth going forward. For Copilot for policy, that was a bit of a different nature of launch. So that was taking an approach of essentially slicing off a single piece of functionality, making that available to users to interact with in a different way. So taking just really a small subset of what our core product is able to do for users from a policy standpoint, giving them the chance to interact much more simply around just a simplified set of functionality. And what's been good about that is, again, we've had a lot of learnings from how users have interacted with it, some different types of users than we have typically worked with in the past. And we've been able to leverage both that technology that we developed and the learnings from that to bring a lot of that functionality directly back into our new core product initiative as well, which is something I talked about in terms of how we're focused on driving these improved customer experiences across the core. So again, a lot of good work from that and good learnings coming from that one.

Great. Thank you very much for taking the questions.

Thank you.

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

All right. Great. Thanks and congrats, Tim and Josh, on your new roles. The gross margin was -- well, overall profitability was great, but gross margin was up nicely. I guess is that -- it seems like that would be sustainable given the drivers here, but do you view gross margin levels as sustainable?

Hi, Mike, it's Jon Slabaugh. We believe so. The gross margins increased by virtue of the Board.org divestiture, which had a little bit of a different cost profile to it. And it's also improved as we deemphasized some of the advisory and service-oriented lines of business. They had a higher fulfillment cost as well. So as we kind of double and triple down on our core policy and global insights business, those are subscription businesses with really great margin profiles.

Got it. Got it. Good. And then in terms of thinking about a return to growth, it sounds like new products are key. Do you feel like the new products you just talked about are sufficient to get back to growth? Or are there going to be others that you're launching here that are kind of critical?

So Mike, it's Josh. So thanks for the question there. So a good part of what's going to help us get back to the level of growth that we expect is what I talked about, generally speaking, regarding product and the focus that we have on product going forward. What's really key for us is creating the right customer experiences that can drive the right levels of engagement that can help us drive better retention as well as that cross-sell, upsell. As I've mentioned before, those are where we have the most significant challenges. And so what we want to do is bring those new experiences to our core products and our core customers. That will give us a very strong basis for growth going forward and the basis of not just growth, but long-term profitable growth, and that will give us the ability to continue to invest in new product development over time as well.

And then just last actually, on the third quarter, that I believe historically has been an important quarter for government bookings. I guess how did the government perform in the quarter?

So yes, Mike, this is Josh. So we saw good government performance in Q3, and that continues to be a strong basis for us going forward as well.

Great. And just last one. You talked a lot about looking at deemphasizing or divesting noncore product areas. I guess, can you give us a sense of what percent of the revenue or ARR could be in that noncore category?

Mike, I don't really want to give any kind of guidance on that right now. I think it's fair to say that a substantial portion of our revenue really is in the businesses that we intend to be in for the long haul. But we're still going through that evaluation and we need to kind of make decisions one by one as we continue to focus on simplifying the business and kind of clearing the path to growth.

Okay. Thanks a lot.

Thanks, Mike.

Your next question comes from the line of Zach Cummings with B. Riley Securities. Please go ahead.

Hi. This is Ethan Widell calling in for Zach Cummins. Thanks for taking mu questions. To start, Tim, congrats on the transition. Can you elaborate maybe on why now is the right time for the leadership transition?

Yes. No, I appreciate the question. I mean I think, first of all, it's been a great run here kind of running the company day-to-day and operating for the last 12 years. As I mentioned in my remarks, I started the company with three guys in a laptop and a Motel 6 room in Silicon Valley have been grinding 365 days a year ever since. And so I do think that the company is quite well positioned here. We have launched a number of new products, have gotten to a place where we have several thousand customers. And as was mentioned today, we've had effectively sort of record profitability on an adjusted EBITDA basis and now consecutive profitability 5 quarters in a row. And so looking at 2025 and beyond, I think we are quite well positioned to make the transition. As I mentioned, I'm still very involved in the business, got a strong interest in making sure that the company continues to be successful, leading the Board and strategy and quite a number of different product and culture-based initiatives. And so I think I've been working with Josh for the last almost six years now and it just seemed like the right time to make that transition here.

Got it. That's helpful. Thank you. And then looking towards fiscal 2025, maybe what assumptions are underpinning your confidence and your return to growth next year?

Sure. So this is Josh. I'll address that. We actually -- we obviously look very deeply in the business to see where things that are working, things that are not. And as I mentioned, a big part of what we're doing going forward is making sure that we're doing the right things to focus on the areas where we see that promise and the opportunity for growth. So a couple of sectors and segments that I've mentioned. We're seeing a lot of promise in international that includes areas of our global policy data sets, our EU policy analysis and global intelligence, and we see that as a very strong foundation as well as in corporates and especially in large enterprise and mid-market. So we're seeing some good signs in the mix of what we review. And then as I said, in addition to just generally speaking, bringing that focus in those areas that work is bringing the focus on the product as well and bringing the right product experiences in front of our customers to help drive that retention and that cross-sell, upsell that will be a foundation for growth as well. And we've been undertaking efforts in that regard. We have improvements underway for our core products and the early signs there that we're seeing are very promising. So we feel excited about the direction that we're going there as well.

Got it. I appreciate.

[Operator instructions] Your next question comes from the line of John Roy with Water Tower Research. Please go ahead.

Thank you. Obviously, there's a lot of focus on growth on the top line and new products and possibly new geos, which would seemingly require new products. I was curious if you could give us any color on the competitive landscape? Are these seeming to you purely greenfield opportunities that no one is there? Are you -- do you see players that are already there? Just curious if you could give us some color on the competitive landscape.

Sure. So this is Josh. And maybe I can help clarify a bit in terms of what I'm talking about in terms of international. What I'm talking about there in the areas that we see promise is really about the global data sets that we have in [indiscernible] and policy analysis that we have regarding markets outside the U.S. So these are assets that we already have. We have customers already engaging with them. And we're seeing a lot of -- as I said, we're seeing metrics and indicators underneath that are giving us an indication of a lot of promise in terms of the demand for those existing data sets and content sets that we already have. And so when I'm talking about the optimism that we have in terms of where we see that promise going forward, it is in regards to data we already have, content we already have and focuses in on products we already have, but the improvements to those products that we are making in order to drive better engagement with our existing customer sets. We do see promise in new logo as well. And -- but in terms of key areas that we're focused on in terms of driving that continued improvement. A lot is focused on that retention, cross-sell, upsell, and that's where the improvements to our existing current core products come into play. Does that help answer the question?

You've got a lot already in hand to really get to these new areas. That sounds great.

We have no further questions in our queue at this time. I will now turn the conference over to Bob Burrows for closing comments.

Great. Thanks, Krista. That concludes our call this evening. We appreciate everyone's participation on the call. With any additional questions, please contact any of us. And again, all materials related to the company's third quarter 2024 financial results are available on the FiscalNote website. We look forward to speaking with all of you again in the future. Good night.

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