FiscalNote Holdings, Inc. Class A common stock

Good morning and welcome to Fiscal Notes Q4 2022 Earnings Conference Call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Sarah Buda, Vice President of Investor Relations. Thank you. Please go ahead.

Hi, everybody. Welcome to the Fiscal Note Q4 2022 earnings call. During this call, we may make 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 statement. For a discussion of 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 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 Fiscal Notes Chairman, CEO, and co-founder, Tim Huang.

Thanks, Sarah. Thank you for joining us this morning.

On today's call, I will review our fourth quarter and full year results for 2022 and offer some perspective on the fundamentals of our business as we build an enduring growth company with compounding subscription revenue growth, strong gross margin, and over time, an impressive free cash flow model. I'll then turn it over to our CFO, John Slabaugh, to talk about the details of our financials and our outlook for the year as we swiftly move toward the inflection point of profitability. Before I begin, as many of you are new to the Fiscal Note story, let me start with an overview of who we are and what we do. At Fiscal Note, we're on a mission to help our customers make sense of the complicated and constantly changing world we live in. We do this by delivering a proprietary SaaS platform that uses artificial intelligence to collect, analyze, and synthesize massive amounts of regulatory, legal, and policy information. We then apply human intelligence and workflows to make this data usable and actionable for our customers. Changes in policies, regulations, and laws impact the decision-making of almost every organization around the world, from changes in regulation to mandatory reporting requirements that organizations must comply with, often on a global basis. As such, we're building an enduring company for the world's most important and influential decision makers. These customers range from hundreds of government agencies and public sector customers in the Department of Defense, the White House, every member of the House and the Senate in the United States Congress, to Federal Reserve and public sector organizations in Europe and Asia, to major corporate customers, including half the Fortune 100 that need to stay on top of an ever-shifting regulatory, political, and geopolitical landscape in countries around the world. These customers rely on Sysmore every day to help interpret the impact of policy, legislation, and macroeconomic shifts on their institutions. More importantly, to take actions which achieve their business objectives and minimize political and economic risk. This forms the basis of our durable and long-term growth. Since we founded the company, we have been building a category creator which constantly innovates to turn insights into action, convert challenges into opportunities, and mitigate risk to protect operations. In a sense, we have become an increasingly mission-critical and ubiquitous Bloomberg terminal of political, legislative, and regulatory information at the local, state, federal, and global level. We've invested tens of millions of dollars in almost 10 years building a defensible combination of data, information, and artificial intelligence technology to select, synthesize, and make sense of an exploding pace and volume of dynamic, unstructured, regulatory, political, and legal information around the world. as well as the software workflow tools to help our customers respond. The same way that other information companies, such as S&P Global, IHS Markit, FactSet, Morningstar, CoStar, and Avalara have innovated in their respective information fields, JustGlo continues to deliver mission-critical information that has a direct impact on our customers' operations. Now let me summarize the company's financial position that serves as a platform for our compounding profitable growth in 2023 and beyond. Our revenue continues to grow with a large customer base that renews contracts and subscriptions every year. For 2022, we grew our GAAP revenue 37% year-on-year to about $114 million, further evidence of our ability to deliver compounding growth even in a difficult macro environment. Looking at management KPIs, we grew our run rate revenue to $127 million of which 125 million was organic. Our annual recurring revenue, which represents 90% of total revenue, was 113 million, marking growth of 14% year-over-year and 13% on an organic basis. And we increased our net revenue retention to over 100% on a trailing 12-month basis, a strong reflection of our successful cross-sell and up-sell model and the must-have mission-critical solutions we deliver for our customers. Further, we also provided guidance for 2023 that indicates another strong year of growth and momentum for fiscal mode, with gap revenue of $136 million to $141 million, marking growth of 20% to 24% year over year. We also expect run rate revenue of $148 million to $155 million for the year, underpinned by our recurring revenue, with thousands of blue chip customers and high retention rates. As we're proving, our durable business model creates a high degree of predictability, We take our customers from the previous year, renew them, and upsell those customers with new products and capabilities to grow our business while simultaneously adding new customers each year. These customers continue to renew at high retention rates because of the strength of our product and the deep customer relationships that we have built. JustGlo has always been differentiated, given not only recurring revenue base, but also its high adjusted gross margins, which are in the 80% range. These adjusted gross margins The results of our SaaS business model, AI pedigree, and data-rich products provide the basis for strong free cash flow in the future. We remain on track to be adjusted EBITDA positive in the fourth quarter of this year. Furthermore, our growth, high net retention, stable adjusted gross margins, and increasing efficiency in our operations mean that we are on track towards impressive free cash flow margins in the future beyond this near-term adjusted positive EBITDA profitability milestone. We are well capitalized from a cash perspective due to the public listing process and the proceeds we have obtained in the summer of last year. We are capitalized fully and do not require any additional capital raises to achieve our plan of positive adjusted EBITDA profitability and free cash deposit margins. And finally, to complement our recurring revenue organic model, we continue to find deeply additive M&A opportunities for growth. to send fiscal capabilities into new geographies and customers, such as Eastern Europe and Africa with DT Global, new technologies such as alternative and macroeconomic data, and APAC with Eiffel Technologies, our JSON products and capabilities, such as terrorism, cyber, and operational risk analysis for governments and companies with Dragonfly. These acquisitions continue to fuel additional growth factors for the company in a number of new directions and provide a pathway for long-term compounding growth. Our acquisition pipeline remains active, but we continue to be thoughtful and diligent as we pursue a creative acquisition and valuations aligned with the fundamentals of the business and deal structure that minimize solution. We are prudent and strategic capital allocators, and we'll always be judicious to prioritize investments that drive highest return for our shareholders and deliver results for our customers. John will get into the specifics of our financial results and the details for our outlook of 2023. Now, let me touch on the strong fundamentals of business that serve as a platform for our growth in 2023 and position fiscal to deliver outpaced returns over time as we continuously allocate our attention and capital towards driving long-term profitable growth. First, our strategy begins with a large total addressable market with secular trends related to the ever-increasing and rapidly changing regulatory, geopolitical, and economic operating environment. Experts of size are tamed at $37 billion, which is what companies and organizations spend every single year on products and services related to legal, regulatory, and policy information. Our market is driven by political events and a regulatory environment that we do not see slowing down. As always, the world continues to become more and more complex and volatile for our customers. Military conflicts and civil unrest in regions across the globe, local market supply disruptions, the transition to a new energy economy, and emerging technologies for regulators and politicians around the world to respond with new regulations, which in turn creates uncertainty for all organizations. These trigger events create demand for our products as our insights and answers help customers make sense of this exploding volume of unstructured, dynamic regulatory policy and macroeconomic information to address uncertainty, manage risk, and make decisions about operations and strategies. Historically, making sense of all this information has been a manual and opaque process. We believe it remains a massive underserved opportunity to use AI to structure, normalize, and analyze and digitize all this information. JustGloat is now positioned better than ever and better than anyone to help the world understand what exactly is going on in policymaking around the world, from all-out war and military conflict in Eastern Europe to the awakening of a new relationship with our over a century the world is an increasingly complex and uncertain place and we believe fiscal is well positioned to be the primary beneficiary of the ongoing policy and regulatory complexity and risk exposure we are still just getting started as an example the european market stands as one of the most regulated markets in the planet and yet only 10 percent of the revenue comes from this market we are at the beginning stages of our european expansion And I believe that similar to other large-scale information services leaders, we can build a business that can rival the size of our North American business with just our current products today. Of course, we're simultaneously pushing the boundaries of what we provide to our customers through constant innovation and by expanding to areas such as ESG and compliance that provide new avenues for growth into the future. Ultimately, we see multiple growth factors for fiscal to capture the large market of legal, regulatory, and policy information. The second component to our fundamentals is our scalable operating model that long-term will enable us to drive conversion of incremental revenue to operating profit. The model is quite simple. We have a proven mid-teens organic growth. Add to that our M&A program of token acquisition that broaden our reach and cross-sell. We renew our customers year after year and expand our relationships by adding new data sets and products. This is the compounding recurring revenue growth model we've proven. With this model, we're driving adjusted gross margins at the 80% range. We've also built a strong operational foundation in R&D, sales and marketing, and G&A to support the operations of a large, growing, durable public company at the forefront of AI. We now have global operations from Washington, D.C., New York, Austin, Texas, Madison, Wisconsin, London, Brussels, Kyrgyzstan, Seoul, Singapore, Sydney, and Taipei that give us more reach than ever before and the operations to meet your global opportunities. Moving forward, we can build on this foundation to drive growth. Further, as John will detail, we have made and will continue to drive efficiencies in the organization using technology and workflow improvements, and by finding areas of expense where we can drive efficiency. Finally, and perhaps most important, is our fundamental competitive advantage, a unique and defensible combination of data, AI, and human intelligence. We have an incredibly comprehensive amount of data that we've collected over the past decade, of significant relevance to what governments and the private sector are interested in. We also have an incredibly comprehensive AI platform that we use to aggregate, synthesize, and structure this domain-specific data. And we have the human intelligence and the software workflows to make it usable and actionable for our customers. Further, our AI models incorporate the insights we gain from the thousands of customers that we have every single day to enrich our products. This combination of AI and data creates our sustainable technology mode. As we have seen in many industries, we're beginning to see significant advances in artificial intelligence, which is especially encouraging for fiscal notes as advances in AI technologies, including ChatGPT and GPT-4, serve to enhance and accelerate our business through both increased demand and increased operational efficiency. We believe the combination of generalized foundational AI models with fiscal notes domain-specific models will create defensible insights that will further enable us to efficiently optimize our data collection efforts while building novel applications and user experiences that enhance efficiency for fiscal year customers. The advantages of AI acceleration should manifest itself in multiple ways. One, in areas related to customer experiences, such as faster prototyping and data collection efforts using our machine learning and tremendous data advantage. Another is more efficient and effective operations, such as a larger level of personalization, content dissemination and review, or more efficient customer service and engineering automation. We have and will continue to incorporate elements of AI at all levels of the company to drive competitive advantages and differentiation, as well as better operating margins for the company. Last week, for instance, we announced our collaboration with OpenAI, which demonstrates our continued market leadership in AI, leveraging the most cutting-edge technologies in the space. This expanded user interaction through language models such as OpenAI will help create a flywheel to try future product development for fiscal and domain-specific models, enhance accuracy and relevancy for our customers, and enable us to swiftly extend our leadership in the application of AI and large language models related to these specialized datasets. In sum, for those of you who know our team, you know that we are purists for building an efficient business with strong fundamentals and for deploying a resilient capital allocation model for long-term growth and cash flow. That's exactly what we've built here at Fiscal Note. Our capital management strategies support our foundational goal to be an enduring profitable leader in our sector. All capital allocation strategies are aimed at allocating our time and capital on those actions that drive the greatest return and that minimize dilution for shareholders. Given the strong fundamentals of a recurring revenue business with high gross margins, we believe we have more flexibility than others to allocate capital to the areas of greatest return. To that end, as a team, we are inherently cost-focused given this emphasis on efficient capital allocation. We have and will continue to drive efficiencies in our business while ensuring we are innovating for the future. With our cash on the balance sheet and access to our accordion, we have sufficient capital to support our growth and fund our M&A. As we achieve our adjusted EBITDA profitability goals this year, we will be well-positioned to drive margins in line with other leaders in information services. Before I turn it over to John, let me comment on the dynamics we're seeing in the public market. By all accounts, this company is in a great position on a fundamental basis. We continue to grow, continue to maintain strong relationships with customers through our retention and subscription model, continue to support a high gross margin and long-term free cash regeneration, and continue to innovate for the future by expanding our product suite and geographic footprint. Despite this, as you can see, there's a clear disconnect between those fundamentals of our business and our public market valuation. We believe that this location is temporary. As long as the fundamentals continue to deliver for the business, there will always be options to create value for shareholders in the long run. What we are doing and will continue to do as a management team is to build an enduring long-term growth company for the future, one that delivers great products and services for long-standing customers and maintains a high rate of gross profit for reinvestment to the future. So despite short-term technical gyrations in the public market, Our leadership remains steady, and the long-term opportunity for fiscal need has never been more clear. As the FAMS investor, Benjamin Graham, said, in the short term, the stock market is a voting machine. In the long term, it's a weighing machine. In 2023, we are in an environment where the tide is coming out, and recurring revenues matter. High gross margins matter. Long-standing customer relationships matter. Deeply experienced and committed management teams matter. And differentiated technology and proprietary product investments matter. When the dust settles from the capital market, and after the markets have sorted through and identified the real businesses with strong fundamentals, I believe fiscalness will and has proven itself as a business that matters. In summary, as we look back on 2022 on a fundamentals basis, I am delighted with the business and our progress. We believe fiscal is well positioned to be the primary beneficiary of global policy complexity, given the myriad of political, economic, and operational challenges that exist. We are proving our compounding growth model through a combination of organic growth and a creative M&A underpinned by our diverse and blue chip customer base. We are building an enduring and resilient business and a growing and increasingly important market. We are growing in new geographies, markets, product areas, and customer segments that create continuous new vectors for top line growth and innovation. Furthermore, advancements in AI benefit us in customer differentiation and targeting the top line, and efficiency and automation on the bottom line, given the immense data advantage that we have. We are further delivering on the commitments we outlined in our last call by coming in at the high end of our revenue guidance with strong net retention and high gross margins. We are executing on our 2023 plan for ongoing revenue growth with a clear path to profitability. We are fully capitalized on our plan. Over time, this will translate into growing free cash flow margins, enabling us to lower our cost of capital and grow our business into the future. And finally, we are led by a disciplined, experienced, and exceptionally talented management team with a relentless focus on sustainable, profitable growth and smart capital allocation to build an enduring company for the future. Every single day, we work to earn the trust of thousands of the biggest and most important companies, governments, and people in the world who rely on fiscal solutions to discover and navigate the impact of government policymaking on their organization, and more importantly, to take actions which achieve their business objectives. This was and remains the heart of our vision for fiscal year. I have never been more passionate about the mission and more optimistic about our future growth opportunity. With that, I'll turn it over to John to discuss our financial performance and outlook.

Thank you, Tim, and good morning. I'm going to spend some time providing further details on the fourth quarter in fiscal year 2022. I'll also discuss what to expect in terms of financial performance for this year and walk through our path to positive adjusted EBITDA and over time positive free cash flow. Let me start with revenue. Fourth quarter revenue is $31.4 million, marking growth of 29% year-over-year in total and 18% growth on an organic basis. Full year 2022 revenue was $113.8 million, marking 37% growth year-over-year in total and 15% growth on an organic basis, which excludes the 2021 and 2022 acquisitions and sunset revenues. Non-GAAP revenue was $115.7 million for the year. We are proving our strategy of delivering compounding growth driven by mid-teens organic growth and accretive strategic tuck-in acquisitions that we can immediately cross-sell and up-sell to our customers. This has been our track record, and we expect to continue this revenue performance moving forward. Fourth quarter subscription revenue, which makes up almost 90% of our total revenue, was $27.3 million. an increase of $6.4 million, or about 31% from a year ago, and 15% growth on an organic basis. Four-year 2022 subscription revenue was over $100 million, an increase of approximately 36% year-over-year in total, and 13% growth on an organic basis, which again excludes the 2021 and 2022 acquisitions and sunset revenues. Our advisory advertising and other revenue was $4.1 million in the fourth quarter and $13.2 million for the year, growth of 49% year-over-year. We exited 2022 with run rate revenue of $127 million in total, marking 14% year-over-year growth. Run rate revenue is defined as ARR plus non-subscription revenue earned during the past 12 months. It is a key management metric and serves as a baseline for the upcoming year. On an organic basis, run rate revenue was $125 million, also reflecting a 14% growth on a pro forma basis. We grew our total annual recurring revenue, or ARR, to $113 million as of December 31st, an increase of 14% to the same period in 2021. Organic ARR was $112 million as of year end. This represents a 15% growth rate when compared to our ARR at December 31st, 2021 on a pro forma basis. We ended the year with NRR or net revenue retention of approximately 100% on a trailing 12-month basis. While NRR rates can fluctuate slightly from quarter to quarter, We are delighted to reach the 100% mark, which affirms CRIT fiscal notes, build and buy strategy, leveraging our customer relationships with strong cross-sell and upsell efforts. Looking at gross profit, we continue to enjoy strong margins. Our Q4 gross profit was $23.1 million, representing a 73% margin. Our fourth quarter non-GAAP gross margin was $25.6 million, representing an 81% gross margin after adjusting for deferred revenue and amortization. For full year 2022, our gross profit was $81.8 million, or 72% margin. And our non-GAAP gross profit was $92.8 million, reflecting an 80% gross margin. Sales and marketing costs were $42 million for the year, a notable increase from a year ago largely due to acquisitions. R&D expenses were $20.7 million for the year, a reduction of about $4 million from a year ago due in part to increased software capitalization. Editorial content costs in 22 were approximately $16 million, a million-dollar increase over last year. G&A expenses for 2022 were $77 million. This includes approximately $37 million of non-cash items primarily related to the accounting treatment of non-cash stock-based compensation expenses that were triggered as a result of our D-SPAC public listing transaction. Excluding these non-cash charges, G&A was approximately $39.5 million, an increase of $11 million from a year ago, largely driven by increased public company expenses. I will provide some 2023 OPEX details in a minute. Our total interest expense for the full year was $95.7 million, which includes significant one-time non-cash charges related to the conversion of our legacy convertible notes as part of our business combination and public listing process. Our fourth quarter interest expense of approximately $6 million reflects our cash and non-cash interest expense reflective of our current debt profile. Going forward, we expect to pay approximately $4.5 to $5 million of cash interest each quarter. Also contributing to our net loss in 2022 was a non-cash charge for $11.7 million related to a loss contingency recognized as the result of the previously announced proposed lender settlement agreement. Offsetting some of our one-time charges, we had a non-cash gain of approximately $16.1 million related to the mark-to-market of the public and private warrant liabilities and a $7.7 million non-cash gain from the forgiveness of the company's PPP loan. The GAAP net loss for fiscal year 2022 was $218 million, which is reconciled to our adjusted EBITDA loss of $24.4 million in our press release. Our balance sheet remains solid with $61.2 million of cash and cash equivalents as of December 31st. We conduct extensive cash forecasting and scenario planning on a regular basis. We have sufficient capital to support our growth initiatives and fund our past deposit of adjusted EBITDA in the fourth quarter of this year and beyond. Further, we are taking steps to reduce our cash expenditures. This brings me to our guidance for 2023. For the full year, we forecast a run rate revenue of $148 to $155 million, inclusive of the recent acquisition of Dragonfly. and excluding any future acquisitions we may make. We've set gap revenue of $136 to $141 million, marking growth of 20% to 24% year-over-year, including the acquisition of Dragonfly. On an organic basis, in 2023, we expect to deliver another year of mid-teens organic growth. In terms of cadence during the year, for those who have followed fiscal notes, you already know that a significant portion of our revenue growth occurs in the third and fourth quarters. Our sales team is staffed and optimized for growth, an effort that will lead to higher recognized revenue throughout the course of the year and into 2024. We expect adjusted gross margins to be approximately 80% and adjusted EBITDA loss between $8 and $6 million for the full year, achieving adjusted EBITDA profitability in Q4. And now looking at the first quarter, we expect revenue between $31 and $32 million, with an adjusted EBITDA loss of $7 to $6 million. While this level of adjusted EBITDA loss may seem high in light of our four-year guidance, Q1 includes $1.5 million of seasonal public company costs, including our first-year audit after listing and seasonally low revenue recognition from our non-recurring revenue. Regarding operating expenses, we've taken steps to reduce costs in order to increase efficiency and productivity. These measures will drive significant benefits that will translate into meaningful bottom-line improvements starting in Q2 and Q3, paving the way to adjusted EBITDA profitability in Q4 of this year. This includes many efforts across the board, such as adjusting our talent allocation models and locations, aligning our revenue-generating teams to the highest potential clients and market segments, improving our internal processes and workflows, in consolidating, reducing, and eliminating spend with external contractors and vendors. For example, we have already relocated a majority of our customer support teams to lower-cost offshore locations, improved business development productivity by modifying our service model and coverage ratios, consolidated product development and related R&D teams, and eliminated many external vendors and contractors, significantly reducing the spend with some of our larger technology vendors. We continue to actively evaluate and restructure our business processes and operations across the company. We will realize additional savings in 2023 from these ongoing cost initiatives. As a result, these improvements are driving strong conversion of incremental revenue to adjusted EBITDA. Specifically in 2023, At the guidance midpoint, we are adding approximately $25 million of incremental revenue year over year. With 80% adjusted gross margins, this will drive approximately $20 million of incremental gross profit. During this time, we will add only $3 to $4 million of marginal OPEX, inclusive of acquisitions. This converts to a year-on-year EBITDA improvement of $17 million. We are achieving this by realizing $6 to $7 million of in-year expense reductions from the efficiencies I just highlighted. Beyond 2023, we will continue to drive strong EBITDA conversions as we maintain high adjusted gross margins and leverage the relatively fixed operational foundation. As Tim mentioned, we are actively pursuing M&A, which has been and will continue to be a building block of fiscal note's long-term growth strategy. We are being selective to ensure we find the right targets at the right valuations and focusing on opportunities that uniquely address our customers' most pressing needs and will drive predictable and sustainable compounding growth in a creative EBITDA. We have always been resourceful in structuring our acquisitions, and at our current stock price, we will continue to use structure to minimize dilution to existing shareholders. We have been successful with this approach in the past, and we have a robust pipeline of actionable opportunities that reflect the realities of today's M&A environment. Further, you can see from our updated credit agreement we recently filed, our lenders remain flexible and continue to be supportive of the company's focused strategic acquisition program. Finally, I'd like to comment on our cash position and future liquidity. As I mentioned previously, fiscal year finished 2022 with $61.2 million of cash on the balance sheet. This cash balance fully supports our planned growth and path to adjusted EBITDA profitability later this year in free cash flow. For context, under our current operating model, we expect our cash balance to exceed $30 million a year from now without additional equity infusions. Fiscal note is fully capitalized and currently has no plans to raise additional equity capital. Fiscal note operates on a bottoms-up budget and a multi-year plan tied to our strategy We track performance, respond to variances, and update monthly forecasts to make sure we're on track to meet financial expectations. As discussed, we've taken actions to reduce our operating expenses, and we're continuing to optimize our operations across the board. We are prepared to take additional actions if needed in the future. In addition, we're working aggressively to accelerate free cash flow and will comment further on a subsequent call. In closing, we're delivering on top-line growth as we execute our strategy to build a compounding growth profitable business that provides mission critical solutions to the world's most important decision makers. There are secular trends propelling our business and creating sustainable demand from increasing regulation to geopolitical complexity to macroeconomic uncertainty. Only fiscal note has the breadth of AI enhanced data and human intelligence to help customers navigate this increasing operational complexity. Demand for our products is strong today. It will only grow as we add data, workflows, and new adjacent solutions. With highly predictable recurring revenue, strong gross margins, and ongoing cost management, our path to profitability is clear and accelerating, and we have the operational structure and capital we need to scale this business and drive long-term value. We look forward to working with you, our shareholders, as we continue to build an enduring market leader for the future. With that, I open it up to the operator for questions.

Thank you. As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Matt VanVleet from BTIG. Please go ahead. Your line is open.

Yeah, good morning. Thanks for taking the questions. I guess first, Tim, you mentioned that Europe could be as large potentially as the U.S. market, but only 10% of the company today is coming from that region. Maybe walk through kind of what the recent hiring plans have been to expand in that market. What other additional investments are you expecting over the next couple years? And then ultimately, kind of what kind of revenue growth or other growth metrics you can share are you expecting in both 23 and maybe 24 from Europe specifically? Thank you.

Yeah, thank you. I appreciate the question. So I think the first thing is that we have been in the European market for a couple of years now. We started off in the Brussels market by really looking at European commission information, European data information. in addition to information coming from different member states. And that's really just a reflection of the continued expansion of the data and opportunities that we see overall in the market. Additionally, over the course of the last couple of years, we have made a number of acquisitions in the European market that have expanded the scope of our footprint, as well as the customer base that we have in the marketplace. So I'll point you to a couple of companies like Oxford Analytica, Dragonfly, our most recent acquisition, DT Global, and others. that have expanded our footprint throughout the United Kingdom as well as Western and Eastern Europe. Those acquisitions by themselves actually constitute the beginning foundations of what we see as a larger European opportunity. And so a couple of different things. The first thing is just the continued application of our technology in the European market enable us to add more data for our customers. And the second thing is just the reality that there's a large number of multinational companies and European governments that we continue to be able to sort of bring into our overall customer roster. We're not really giving guidance right now, particularly to the European market, but it is a very big focus of ours as a management team, and it's something that we're continuing to keep an eye on here.

Okay, very helpful. And then when you look at the recent partnership announcement with OpenAI, I know you expanded on a little bit on the call, but curious in terms of How you're thinking about that being sort of a product or monetizing that partnership? Is it something that eventually you'll turn into or build out specific use cases or products around? Or is this really geared towards enhancing the current platform and just sort of pushing ahead on your competitive advantage there? in which you can either cross-sell a little bit more of that or raise prices over time to include that functionality?

Yeah, so I think the first thing about the partnership that we have with OpenAI is just really that's a reflection of the decade log investment that we've made in artificial intelligence and data collection we've been making in the legal and regulatory space. As you mentioned in our press release, we are the only legal and regulatory partner for open ai as part of their chat gpt plug-in program here overall so uh there's a couple of different areas that we're really looking at so the first is enhancements to customer experiences so we are in a situation right now as a technology industry where interactions with computers are fundamentally changing where we're seeing the opportunities to enhance customer experience experiences quite rapidly and the inclusion of these new technologies is just another reflection of fiscal is continuing ability to innovate for the future and actually bring in some of these capabilities right so we talked a couple of a couple about a couple of these things earlier in the call things like personalization better search relevancy uh better efficiency in terms of data collection um those are all areas where customers are going to see improvements as a result of uh you know the data collection efforts that we have as well as broader partnerships that we have inclusive of open ai i think The last thing I do want to touch on is something that I briefly touched on in my earlier remarks, which is that we do expect to see some efficiencies from automation as well. And so those come in the form of things like faster time to market, reduced R&D expenses, faster product cycle innovations. Those things all have direct impacts on our income statement. And of course, the combination of better customer experiences and more efficient R&D operations we do expect to see a real impact for the business overall here.

Great. And then if I could just squeeze one last one in around the SBB, I guess, issues going on there. Any impact that you're seeing on the M&A pipeline directly from that or valuations sort of, I guess, resetting lower on some of the fallout there? Any update on the M&A pipeline around sort of recent events would be very helpful. Thank you.

You know, I don't think that the S&P situation has had a material impact on M&A, but I will comment that from a macroeconomic perspective, we are seeing a large number of deals come across our inboxes. And so as we evaluate those deals, we have seen a material shift in terms of expectations of folks, as well as the around structure or price or whatever the case may be. We are constantly evaluating deals every single week, and we are trying to make good decisions around the types of markets we want to be in, the types of products we want to be in, and, of course, the way that we structure those deals to minimize dilution for shareholders and ultimately drive the most equity value for the business. So, in short, no impact from SVP, but obviously there are broader macroeconomic impacts here.

Great. Thank you.

Our next question comes from Mike Lattimore from Northland Capital Markets. Please go ahead. Your line is open.

Thank you. Yeah. Congrats on the strong finish to the year there. I guess just on the last comment there, so you said that you saw a material shift in expectations. So basically, is the point there that just valuation expectations have been coming down this year?

Is that the point? Hi Mike, it's John.

We have seen expectations kind of rationalizing and not only in terms of headline value but also the willingness to work around structure, inclusive of structure consideration and earn outs. So I think that it's fair to say that the types of transactions that we've been looking at are actionable at lower multiples than maybe previous years.

Great to see the NRR over 100%. I guess, do you view that as sustainable, or could that improve this year? And maybe touch on one or two points that really kind of moved it over 100% during the year?

Sure. We've asked Josh Resnick, our President and Chief Operating Officer, to join us here on the call, and I'll let him comment on that.

Hey, Mike. Yeah, I can address that on NRR. So, You can expect to see NRR continue to remain relatively consistent, should fluctuate, you know, quarter to quarter, but remain relatively consistent. We're very focused on hitting the two key levers that drive it, gross retention and upsell cross-sell. And, you know, with a lot of the changes that we've been making on the revenue side in particular, we've been thinking a lot about how we structure our account management customer success functions. to help drive that on the retention side in particular. And with our new chief revenue officer in place, have been adjusting our go-to-market focus to help drive new logo sales as well.

Great, great. And then just on the broader demand environment, can you talk a little bit about what you've seen in the fourth quarter, first quarter, say relative to third quarter, in terms of just deal sizes, sales cycles, maybe distinguish a little bit between government and commercial sectors?

Sure. So, you know, we had talked back in Q3 about, you know, seeing some pauses, you know, and a little bit of hesitancy in the private sector. We saw that continue in the Q4, mainly in new logo in enterprise. We're still seeing some budget hesitancy, which is factored into our guidance for the year. um you know we still believe our solutions are critical um which is what's still driving this uh the mid-teens organic growth that we're forecasting here we're helping uh enterprises with um existential issues that they have around risk and opportunity you know could be um uh cyber security uh data privacy regulations you know expansion and contraction of lines of business so we're still seeing tremendous amount of value, and we're seeing our ACVs grow. So we feel like there's a lot of health there, although still from the macro environment, still driving a bit of that budget hesitancy, especially on the enterprise side. So continuing to see a balance of growth in private and public sector, although public tends to be that kind of steadier, more reliable backbone, and we expect to drive more growth through private sector going forward.

In terms of that private sector dynamic, any change since the third quarter or is the environment similar to what you saw in the third quarter?

The environment is still generally similar. Still trying to work through a lot of the malaise in the macro environment that you see and hoping to see some improvement as the year goes along. Again, we factored that into our guidance for the year.

I just asked on the few acquisitions you made over the past year. Can you talk about, you know, have you seen improved growth rates or good cross-sells or just a little bit more of the traction from the most recent acquisitions?

Sure, Mike. We've seen really impressive acceleration out of the acquisitions. When we file the 10K later, there will be some breakouts in detail there. I'll share with you that, you know, the legacy business grew at a rate of, I believe 11% year over year, while the acquisition cohort from 2021 and 22 were in the 20s. I think 21% growth for those groups. 23% for the acquisition group. And that just represents putting them on the platform, giving them access to our customer base, and really letting our business development team do their work to drive revenue growth.

Great. Sounds good. Thanks a lot.

Our next question comes from Rudy Kessinger from DA Davidson. Please go ahead. Your line is open.

Hey, thanks for taking my questions. John, you said, I think you said a year from now you expect to go up $30 million plus in cash. And so I guess you're effectively saying $30 million or less of cash burn over the next 12 months. Is that inclusive of your expectations of future acquisitions over the next 12 months? Or is that just based on the core business as is today with no acquisitions taken?

Sure. That's excluding any acquisition you might do between now and then. It's the operating model that we've built for the business as it stands today and taking into consideration, you know, growth, operating expense, and seasonality of the business as well. And just as a point of clarification that, you know, when I say a year from now, I'm referring to a year from today as well.

Okay, so it's actually end of Q1, not – end of Q1, 24, not Q4, 23. Okay. And then what is the – what's the go-forward interest expense? I don't know if you can break it out explicitly for Q1 or for the full year, but it was roughly $6.1 million in Q4. You made another acquisition in Q1, brought in some more debt. What's – and rates have changed. What's the go-forward interest expense for Q1 in calendar 2013?

I think I referenced this in the call. The cash interest expense is $4.5 to $5 million. And in light of the recent change, you might use the higher end of it.

Okay.

I think you might have broke up at the end there. And then maybe just one last for me. In Q4, I know we'll get this in the 10K, but how much revenue came from DT Global and ASIL in Q4? And then when you look at your revenue guide for 23, how much revenue do you have baked in there from Dragonfly, DT Global, and ASIL?

So, 300K in Q4 for those two entities. When we think about the year going forward, Rudy, the guidance we gave We gave it kind of width, and then I guess in the previous filing gave a range of Dragonfly's revenue, which was 6.5 million pounds, or about $7 million. So you can back that out of the guidance range as well. So when you do that, I think you wind up with an organic growth rate at Dragonfly of approximately 13% to 17%.

Okay, got it.

That's it for me. Thank you.

We may do some work to back out ASIL and data hunt specifically if that's something you want to follow up on. For DT and... Yeah, DT and ASIL.

Yeah, okay. Good, that's it. Thanks for taking my questions.

As a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from Mike Albanese from EF Hutton. Please go ahead. Your line is open.

Hey, everybody. Thanks for taking my question here. Congrats on a nice Q4 and a solid finish to the year. I just have one clarifying question for you guys when I think about 2023 guidance. I mentioned an additional, you know, at the midpoint, an additional 25 mil revenues, 80% margin, so, you know, 20 mil incremental gross margin, and then an incremental three to four in OpEx, kind of on top of, you know, your current, I guess, cost basis, plus some savings that you had talked about. Can you just kind of walk me through that one last time?

Right. So, the increase in OpEx is primarily related to the addition of Dragonfly, which came with revenue and obviously some expenses. What we've done to date and will do prospectively is take $6 million to $7 million of operating expense out of the business in-year. That number translates to probably closer to $12 million on a four-year basis. And those are adjustments that we're working with Josh and his team to make we have made and will continue to make over the course of the year.

Got it. Okay, great. Thank you. That's it for me.

We have no further questions. I'd like to turn the call back over to Tim Huang for closing remarks.

Great. Well, I want to thank everybody for joining us on this call here. We obviously had a great full year in 2022. We've given guidance on a positive and really exciting 2023 year. And so really look forward to our next call and appreciate everybody jumping on the call here. Thank you very much.

This concludes today's conference call. Thank you for your participation.