FiscalNote Holdings, Inc.

Good morning, ladies and gentlemen, my name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the fiscal note second quarter 2023 earnings conference call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you. And I will now turn the conference over to Sarah Buda, Vice President of Investor Relations. You may begin.

Hi, everyone. Welcome to the fiscal note Q2 2023 earnings call. During this call, we may make certain statements related to our business that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance, but rather are subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of the material risks and other important factors that could affect our actual results, please refer to 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 on our earnings release and the investor relations portions 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.

Thank you, Sarah. On today's call, we review our second quarter results, our outlook for the remainder of the year, and discuss our durable, compounding revenue, strong gross margins, and the macro trends driving our business. I'll also talk about our Q3 guidance and our expectation to reach the inflection point of adjusted EBITDA profitability in Q3 a quarter earlier than expected. This will be a tremendous milestone for the company and reflects the hard work of the entire fiscal note team to be able to achieve this ahead of schedule. I'll also touch on our positive growth trends, particularly with our enterprise accounts, as we innovate around new products and customer segments. I'll then turn it over to our CFO, John Slabaugh, to talk about the details of our financials as we continue to deliver on our strategy as a profitable, long-term growth compounder. Let me start with a very brief reminder of our mission here at Fiscal Note and the value we bring to more than 5,000 customers every single day. At Fiscal Note, 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 analyzes the impact on their organizations. Changes in policies, regulations, and laws impact the decision-making of almost every organization around the world. With our proprietary AI capabilities, we aggregate, synthesize, and analyze mass amounts of legislative, policy, regulatory, and macroeconomic data and information around the world, and provide actionable intelligence to customers in a subscription model. As such, we're building an enduring company for the world's most important and influential decision makers. From hundreds of government agencies and public sector customers, from the Department of Defense, the White House, every member of the House and the Senate and the U.S. Congress, the Federal Reserve, and public sector organizations in Europe and Asia, to major corporate customers, including more than half the Fortune 100. These customers rely on physical notes every day to discover, process, and navigate the impact of government policymaking on their organizations, and 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. We have become an increasingly mission-critical and ubiquitous Bloomberg terminal of political, legislative, and regulatory information at the local, state, federal, and global levels. The same way that other information companies, such as S&P Global, IHS Market, FactSet, Morningstar, CoStar, and Avalara, have innovated in their respective information fields, FiscalNet continues to deliver mission-critical information that has a direct impact on our customers' operations. We've invested tens of millions of dollars and almost 10 years building a defensible combination of data, intelligence, and AI technology to collect, synthesize, and make sense of an exploding pace and volume of dynamic, unstructured, regulatory, political, and legal information around the world, and the software flows to help our customers respond. With our AI pedigree and our vast array of validated trusted data, we are in a unique position and have a clear competitive advantage. Now, let me start with a summary of our strong Q2 results in our ongoing momentum as we reach the inflection point of adjusted EBITDA profitability next quarter and beyond. In Q2, we delivered another strong quarter of growth with revenue of $32.8 million. This marks an increase of 21% year over year and is yet again consistent with the guidance we provided. We continue to benefit from our recurring revenue streams from a diverse customer base of thousands of organizations that renew their contracts year after year. We also enjoy consistent high gross profit margins. Q2 adjusted gross profit margins were 80% in the quarter. These margins are a hallmark of fiscal node and stem from our SaaS business model, AI pedigree, and data rich products, all of which form the basis for strong free cash flow in the future. On the bottom line, our second quarter adjusted EBITDA loss was 4.3 million, also in line with guidance. Most importantly, we are pulling forward our profitability goals with an expectation for adjusted EBITDA profitability in Q3. Further, through a combination of ongoing growth, high gross margins, and a diligent focus on cost management, we expect to continuously build on our adjusted EBITDA profitability and generate free cash flow in the near future. Our cash position at the end of the quarter was $38.1 million, and we have $94 million of additional debt capacity subject to conditions. We continue to have sufficient capital to fund our growth, and as we've stated, we are fully capitalized and do not require any additional capital raises to fund operations. Turning to managing KPIs, we delivered run rate revenue of $135 million. Our ARR was $120 million, growth of 16% year-on-year total and growth of 7% on a pro forma basis. We expect ARR to continue to ramp through the year as it usually does in Q3 and Q4 as per the seasonal buying cycles of our business. Our net revenue retention was 98%. John will provide details on all our Q2 financials and KPIs, as well as our outlook for the second half, which, as many of you know, is seasonally our strongest new booking, renewal, and revenue quarters. He will also walk you through our guidance for accelerating adjusted EBITDA profitability in Q3. Overall, our revenue growth rate and our net revenue retention rate remain strong and trend higher than most other information services companies, given the mission-critical solutions we deliver for our customers, our ability to continuously innovate, our proven recurring revenue model, and our successful cross-sell and up-sell strategies. And we are reaching a just EBITDA profitability ahead of schedule. As we look to the full year, we provided guidance for 2023 gap revenue to be $136 million to $138 million, representing 20% to 21% year-over-year growth, consistent with the range of previously provided guidance, with a more narrow range to reflect the increased visibility of the second half of the year. We also expect run rate revenue of $143 million to $150 million for the year, an updated range driven in part to the company's decisions to sunset revenue for select unprofitable products and take other actions to optimize long-term profitable growth. We expect ongoing adjusted EBITDA profitability growth from next quarter moving forward and over time to achieve industry normative adjusted EBITDA and free cash flow margin in line with other information services companies in the long term. Our guidance and continued performance are driven by our compounding revenue growth, strong recurring revenue, high revenue retention, and high gross margin profile. Now, let me touch on some favorable dynamics that serve as a backdrop for our growth in the second half and position us for accelerating growth in the long term. First is the large market opportunity we operate in and our unique position in the sector. Increasing regulatory, geopolitical, and macroeconomic and operational risks are top concerns among CEOs and leaders of government organizations alike. New regulations from the US to the EU to China often quickly extend from local to global, creating large regulatory complexity that spreads globally, particularly around issues such as semiconductors, the transition to the new energy economy, crypto assets regulations, the Data Act, and climate change legislation, with significant variation in how and when each region adopts and implements these regulations. This, in turn, creates uncertainty for all organizations and significant top line and bottom line impact for companies that operate globally. Without fiscal note, organizations face a manual, complex, and expensive and inefficient process for tracking, assessing, and taking action on regulations and geopolitical issues. We believe that this remains a large global market opportunity. We spent the last decade applying proprietary AI expertise to structure, normalize, analyze, and digitize vast amounts of regulatory, legal, macroeconomic, and geopolitical information, and to embed workflows that make data useful and actionable for our customers. This forms the basis of our market leadership position and is the underpinning of our durable growth strategy. As we said, we serve three primary groups of customers, government organizations, corporate enterprises, and non-government associations. Among these, large enterprises have been our largest, fastest-growing customer base. Our large enterprise and strategic accounts deliver NRR rates well above our company average and more closely aligned with market-leading software companies. Here, we have a strong record of land and expand growth as we add new data sets, products, and users across the customer's organization. From a large energy company who is extending their fiscal and coverage across 50 states into additional priority global markets, to a new opportunity with a large healthcare company that is evaluating our premium global policy dashboard offering, to our ongoing expansion with a large e-commerce company who is using fiscal to monitor policy changes across 40 countries and are now adding new issue areas. All of these are exciting growth opportunities in our large enterprise customer base. Of course, this strong mid-teens organic growth from large enterprises is supplemented by our solid base of revenue from foreign and U.S.-based government organizations as well as non-government associations, where we have many relationships dating back decades from some of our acquisitions. All of this reflects our ongoing success as a compounding growth company with a broad and diverse customer base against the backdrop of increasing global complexity and uncertainty that we believe only Fiscalone can address with their unique and proprietary products and data sets. Additionally, Fiscalone is constantly searching for new customer segments that drive growth as well. As an example, the European market stands as one of our most regulated markets on the planet, and yet only 14% of 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. This brings me to our second area of growth, new AI products and solutions. We are introducing a series of new products that create clear upside for our land and expand opportunity, not just with an enterprise account, but also our large government customers. The first is Risk Connector. a new internally developed risk intelligence solution that enables enterprises to reveal operational, relational, and reputational risk. Risk Connector brings the power of our proprietary data and AI capabilities to map relationships and identify risks within an organization's supply chain, as well as the organization's customers, investors, partners, and any other vectors through which a risk can materialize. This empowers large organizations in the private and public sectors to anticipate, understand, quantify, and track risks emanating from their operation and their full web of relationships in a way that current solutions cannot. Only a few weeks after public launch, we already have several active proposals in market with large enterprises. We are delighted with the early momentum of this new product, which exemplifies our AI leadership and our unrelenting commitment to innovation that delivers customer value. We are accelerating our AI leadership in other ways as well. In addition to our recent partnerships with OpenAI and barred by Google, in Q2, we established a collaboration with Microsoft to develop a plugin for Microsoft's new AI-powered Bing. This enables Bing customers to access select physical data sets and content. Like other partnerships and collaborations, this enables physical to capture critical insights in how users engage generative models, understand political and regulatory information, which in turn allows us to bring new value to our customers who trust and have confidence in physical data and information as a critical component to their operations. Our integrations with large language model providers like Microsoft and Google complement and extend our own proprietary AI, which has been a cornerstone of our business for over the past decade. One of the most recent AI advances is Fiscal and GPT, which we developed internally. Fiscal and GPT was built leveraging the decade-long investment in AI, ML, and NLP in the legal industry. drawing on the company's existing operations in data ingestion, collection, cleansing, and curation to pull an extensive archive of legal and regulatory data sets from around the world. Despite major advances in AI and the use of large language models in the technology industry, further domain-specific systems are needed to advance the use cases of these models into industry domains. FiscalEd has developed a domain-specific approach to fiscal and GPT to specifically address the unique complexity that exists in the legal and regulatory world and believes that as it further develops Fiscal Note GPT, it will become critical for customers across the legal, policy, and regulatory industry with the application and development into the broader industry. Among its initial capabilities, Fiscal Note assists customers by identifying pressing policy and regulatory concerns, generating new insights and recommendations, summarizing timely and relevant issues, and finding pertinent answers and information from thousands of current and updated databases, which facilitate access to the company's comprehensive data and insights and content. Fiscal Note plans to incorporate Fiscal Note GPT into its continuous innovation roadmap to support customers and deliver new AI-driven capabilities in its workflow and data solutions. In addition to assisting Fiscal Note's core products in improving the experience of existing Fiscal Note customers, such as question-answer systems, summarization, and sentiment analysis, Fiscal Note plans to leverage Fiscal Note GPT for key partnerships with other legal and regulatory data and software companies, and find new revenue streams via APIs to advance the use of its models in the broader industry and by unlocking the full power of its data and AI. Fiscalone GPT represents a major advancement to leverage its domain-specific datasets to adapt and train a large language model for the legal and regulatory world. As we look at the depth and breadth of our AI leadership, our opportunities for growth have never been more clear. From new market expansion opportunities like Risk Connector, to our selection as a partner for the world's most prominent AI companies, to our own fiscal and GPT products. Our broad and deep AI expertise in legal policy regulatory data is advancing our leadership position and providing incremental new growth opportunities. As a result, Fiscal is now positioned better than ever and better than anyone to be a category creator which consistently innovates to turn insights into actions, convert challenges into opportunities, and mitigate risk to protect operations. Finally, I want to touch on our go-to-market strategy and organization. Under the leadership of our new chief revenue officer, who joined us at the beginning of the year, we have conducted a deep analysis of our go-to-market strategy. Over the past few months, we have aligned our sales teams to ensure we are focusing our efforts and allocating talent to capitalize on our highest growth products, our most productive sales talent, and our strongest growth sectors. Our newly formed strategic accounts team is already generating a number of new large-scale opportunities with significant potential. We have developed premium offerings which are now contributing to the pipeline. We are building new partnerships that will help us secure large-scale, multi-year government relationships that could be transformative to our growth. While we have chosen to execute on the sales realignment rapidly, and as these changes take root, they position us well for profitable mid-teens organic growth year after year. Similarly, we are also making some strategic decisions around which products and offerings have the greatest potential for long-term, profitable growth. And in some cases, making hard decisions around products we feel are not representative of the growth and profitability that we expect. We have been dynamic in our allocation of capital, including sunsetting of our underperforming products, and we have adapted our expectations for 2023 run rate revenue accordingly. We believe that with our new product development capabilities, AI leadership, and sales realignment, the long-term opportunity we are creating for ourselves outweighs any near-term impact. Like all great market leaders, we need to remain steadfast in our strategy, innovate for our future growth, and make decisions that ensure we are allocating capital and resources to the highest, most profitable growth opportunities in the long term. In sum, as leaders, we are constantly innovating around new customer segments, new product lines, and new offerings, so we can expand the value we deliver toward thousands of customers each day. We enter the second half with a strongly aligned sales team that is positioned to capitalize on our growth potential. We continue to deliver compounding, durable, recurring revenue. We are positioning the company for re-accelerating growth and industry normative profit margins in the long term. Before I turn over to John, let me put a finer point on our accelerating adjusted EBITDA profitability. As a leadership team, we are highly focused on deploying the right operating model and cost structure to position the business for long-term, profitable, durable growth. The cost realignment program we outlined in our last call is starting to take shape. Our sales and marketing teams are now aligned in support growth. Our GNA is built with opportunity for efficiencies. Our R&D expenses are benefiting from our unique and defensible AI, which results in faster time to market and more efficient product innovation. We continue to execute on our cost actions that allow us to optimize our operating model and reduce our cost structure. This is enabling us to pull forward our profitability goals and achieve adjusted EBITDA profitability in Q3, a quarter earlier than anticipated. And based on our guidance for Q4, we will exit the year with adjusted EBITDA margins at or approaching double digits. a remarkable improvement from when we entered 2023. I am proud of the hard work of the physical team that makes this milestone possible. In sum, our model is simple. We take our customers from the previous year, renew them, and upsell those customers with new products and capabilities that grow our business while simultaneously adding new customers each year. Because of our 80% adjusted gross margin profile and our ongoing focus on OpEx cost management, this model also drives significant operating leverage. leading to adjusted EBITDA profitability in Q3, double-digit adjusted EBITDA margins exiting the year, and free cash flows soon thereafter. Looking ahead at scale, we expect to deliver the margin and cash flow model similar to other sector-specific leaders in information services, which, on average, typically drive free cash flow margins well north of 20%. In summary, we're executing on the opportunities in front of us today, improving our compounding growth model. Our business is underpinned by a large, growing macro environment of regulatory, geopolitical, macroeconomic, and operational uncertainty that continues to generate durable demand for our products. Our foundation of recurring revenue, high adjusted gross profit margins, and strong operational leverage is allowing us to achieve adjusted EBITDA profitability earlier than expected and drive ongoing profit growth moving forward. We have aligned our sales teams and operational structure to capitalize on our growth opportunity and accelerate growth in the long term. As leaders, we are 100% focused on building a durable, profitable, compounding growth company that provides unique value to the world's most important decision makers and scaling this business to $200, $300, $500 million, a billion in recurring revenue and beyond. Now, let me turn it over to John for details on the financials and our outlook going forward.