FiscalNote Holdings, Inc.

2023 earnings conference call. 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 star followed by the number one on your telephone keypad. And if you would like to withdraw your question, again, press star one. Thank you. I will now turn the conference over to Sarah Buda, Vice President of Investor Relations. Sarah, you may begin. Hi, everybody.

Welcome to the fiscal note investor 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 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 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, we review our fourth quarter and full year results for 2023. We will also offer some perspective on our strength and balance sheet position with the recent divestiture of one of our non-core businesses, which underscores our focused product strategy and our commitment to driving a strong return on invested capital. This transaction, combined with our achievement of adjusted EBITDA profitability in Q3, one quarter earlier than we had initially forecast, and our beat of adjusted EBITDA expectations in the fourth quarter, form the base of a transformational 2023 for fiscal note. In addition to hearing from John and me, you'll also hear from our President and COO, Josh Resnick, who will discuss our priorities for 2024. First, let me remind you of some of the core fundamentals of fiscal notes. 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 impacts on their organizations. We are the market-leading AI platform for the regulatory, policy, and geopolitical intelligence sector, essentially the Bloomberg Terminal for regulatory and public policy risk. We operate in a large and growing $40 billion addressable market driven by increasing geopolitical uncertainty and regulatory complexity that impacts almost every organization, from government and nonprofit organizations to large enterprises who operate globally in a highly regulated environment. We have a strong and enduring competitive mode underpinned by our decade-long investment in data, AI, and human intelligence. Our AI leadership is supported by a deep patent portfolio and is recognized by the world's most preeminent AI platforms. We are passionate about our customer success. Thousands of organizations, ranging from government agencies and public sector organizations to major corporate customers in the Fortune 100, rely on Fiscal Note every day to help interpret the impact of policies, legislation, and macroeconomic shifts on their institutions, and more importantly, to take actions which achieve their business objectives and minimize political and economic risk. These customers rely on fiscal and everyday to discover, process, and navigate the impact of government policymaking on the organization, and more importantly, to take actions which achieve their business objectives and minimize political and economic risk. This forms the base of our durable and long-term growth. We enjoy recurring compounding revenue streams with customers who renew their subscriptions year after year and have a proven business model of successful upsell and cross-sell by offering incremental data sets, products, and capabilities that enhance and expand our customer value. We have strong financial momentum supported by healthy compounding top line growth, ongoing adjusted profitability, and a solid cash position. We are relentlessly focused on capital allocation strategies that support our goal to build a durable, profitable compounding growth company that provides unique value to the world's most important decision makers. As we scale this business to $250 million, $500 million, $1 billion in recurring revenue and beyond, we expect to deliver long-term free cash flow margins in line with other information services leaders of scale. 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, Cisco continues to deliver mission-critical information that has a direct impact on our customers' operations. and create an entirely new category within the data and information services space. Further, 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 touch on today's news and what it means for our organization moving forward. Today, we announced the sale of boards.org. This is a non-core division of our business that represented about 10% of our total revenue, but sold for $103 million. including $95 million in upfront cash and an $8 million earn out. The total consideration for this non-courts vestiture represents almost 50% of our recent market cap and 7X revenue multiple based on 2023 ARR, while we currently trade close to 2X. This underscores the stark and real disconnect between the underlying fundamentals of our business and our public valuation. The transaction underscores the underlying value and desirable characteristics of durable recurring revenue businesses that make up the vast majority, approximately 90% of fiscal revenue base, and truly how undervalued the remaining company is relative to its intrinsic value. I'll expand on this disconnect in our special committee process shortly. But first, let me provide some context behind the strategy for this recent investiture and the resulting positive impact on our capital position. Board.org is a peer-to-peer executive community platform focused on structured collaborative insights for executives, response for marketing, operations, HR, and other leadership positions within their organization. We acquired the business in 2021 for a total consideration of approximately $14.3 million, including $10 million in cash and $4.3 million in convertible securities. Over the last three years, our management team drove strong growth for the division by providing sales, marketing, and operational resources to further network and broaden their community platforms. highlighting just another example of the impressive performance and execution abilities of the overall team. Strategically, the divestiture made sense, particularly in light of our decision to rationalize our product portfolio and double down on the AI offerings of products that are core to our growth strategy in the policy, regulatory, and operational risk sector. Operationally, board.org was run largely as an independent business with an organization, which makes the divestiture process relatively straightforward. And of course, financially, it was a win-win as well. We drove a 125% IRR and a 9.5 times cash on cash return in just under three years since we acquired the business. It transformed our balance sheet, allowing us to reduce our debt by over $65 million, reduce our interest expense. It significantly increased our cash position by approximately $15 million. This transaction does not change the fundamental nature of our recurring revenue high gross margins, and positive adjusted EBITDA. On all accounts, this is a very strong transaction for us and underscores our commitment to deploying a rigorous and thoughtful capital allocation strategy. The realization of a triple-digit IRR on an acquired asset as a result of our sound management on compounding recurring revenues is just another testament to the smart capital allocation approach we are taking within the business. We are optimizing our balance sheet to invest in the products and offerings that are core to our strategy and that offer the strongest long-term profitable growth while preserving and enhancing shareholder value. At this point, before I get into the details of 2023 and our plans for 2024, I'll comment briefly on the statement we made in our November call regarding the appointment of a special committee by the Board to evaluate any proposal I may submit to pursue a GoPrivate transaction. The board and the committee, along with their advisors, continue to review the company's ongoing plans and evaluate all strategic options available to the company. As I've said before, I believe the stock is dramatically undervalued on a fundamental basis. The valuation achieved for our board.org divestiture underscores this further. We have a clear AI leadership position in our sector. We generate compounding recurring revenue ARR from thousands of customers. We drive consistent 80% high-justice gross margins. We have an operational foundation that drives extremely high operating leverage. We are profitable on a justice without basis. And we now have an aligned capital structure to support our growth plans. Despite the underlying strength of our fundamentals, our current stock price continues to be misaligned with our view of the value of our business. I fully expect the stock to re-rate to align with the strength of our fundamentals over time. However, as I've said before, if the public markets do not recognize the value of our fundamentals, we will take action to realize the valuation we deserve and drive the best value for shareholders. Regardless of the outcome, we remain relentlessly committed to executing our strategy. As we do so, I'm confident our valuation will reflect the fundamental strength of our organization. Now, let me run through some highlights of 2023 and then turn it over to Josh to discuss our 2024 transformation plan. that positions us for accelerating growth long-term. From a financial position, 2023 was a positive year with a number of milestones. We grew total revenue 17% year-on-year. Subscription revenue, which represents approximately 90% of total revenue, grew 18% year-on-year. On an organic basis, our total revenue grew 7%, and our subscription revenue grew 9% year-on-year. Our adjusted gross margins remained strong in the 80% range. We achieved our goal to be adjusted EBITDA positive one quarter earlier than we had projected. And we exited the year with the fourth quarter adjusted EBITDA of $3 million, which exceeded the company's previous guidance range of approximately $2.5 million and marks an $8.2 million year-over-year improvement compared to an adjusted EBITDA loss of $5.2 million in the fourth quarter of 2022. This transformation of our operational structure is remarkable. This relentless focus on adjusted EBITDA profitability was the cornerstone of 2023 achievements, with every member of the fiscal team focused on driving this milestone. Now, as we enter 2024, having executed on a path to positive adjusted EBITDA and an enhanced balance sheet, we are pivoting to growth and have a measurable, actionable plan for returning to double-digit growth in 2025. We are setting a goal for the organization to achieve $250 million of run rate revenue over the next five years and to do it on a profitable, adjusted EBITDA basis. Josh will detail the specifics of our plan shortly. What is clear is that we already have the foundation elements in place to drive this long-term growth. First, we have clear, unparalleled AI leadership in our sector. In 2023, we introduced new applications for our AI products, including Fiscal and GPT, Risk Connector, and Fiscal and Copilots. Our fiscal and AI co-pilot program is a series of AI-enabled applications that provide intelligent assistance for policy and risk management professionals. The co-pilot program leverages our decade-long investment in AI, ML, and NLP, the proprietary and defensible reasoning and data aggregation tools, as well as the tens of thousands for proprietary and public verticalized data sets and comprehensive information that fiscal collects to provide lightweight applications with very specific use cases. This year, through the co-pilot program, we will launch a constellation of AI agents that include quick applications catered to our individual customer personas that automate the day-to-day work of creating legislation, drafting regulatory and legal analysis, advocacy outreach, and constituent communications or regulatory responses. In doing so, our co-pilots will reduce countless hours that our customers spend drafting legislation, responding to legislation, communicating with constituents, and other tasks. Our co-pilot program will provide incremental growth paths to complement our proven, durable base of recurring revenue solutions. Within our core offerings, we're also driving new applications for our AI products as well. Last year, we introduced Fiscal and Risk Connector, our interning developed risk intelligence solution for enterprise and government organizations. Risk Connector brings the power of our proprietary data and AI capabilities to map relationships and identify risks within an organization's supply chains. as well as an organization's customers, investors, partners, and any other vectors through which a risk materialized. In Q4, we announced that we secured our first anchor customer for Risk Connector, and today we have a number of large-scale opportunities in the pipeline. Second, we have broad and deep proprietary data and intelligence. We continue to add new data and intelligence to expand our customer values. In 2023, we added new geopolitical and security intelligence capabilities to the integration of Dragonfly, leading to several successful cross-sell opportunities within our enterprise sector. We also expanded our EUIT offering, providing stakeholder coverage and data for all 705 members of the European Parliament. Finally, we have a base of thousands of customers that offer tremendous growth opportunities. We continue to enjoy strong relationships with the government, ranging from the DoD to the FBI to the CIA, to the Office of the President with some relationships spanning decades. Internationally, we have relationships with public sector organizations throughout the EU and Asia, and leading non-governmental organizations continue to rely on fiscal note every day to advance their agendas within the political process. Our enterprise customer base, which continues to be our fastest-growing, highest NRR customer group, offers significant growth opportunities as we introduce new enterprise products with higher ACVs and continue to upsell and cross-sell. Additionally, our Europe expansion is on track as well, with new wins both in the enterprise sector and public sector alike. Europe is approximately 15% of our revenue today, a notable increase from a year ago. And we see significant upside here as well. As we said before, we are at the beginning stages of 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 today with just our current products. In closing, at the start of 2023, we told you that we would become profitable on an adjusted EBITDA basis, and we did, one quarter earlier than expected. We told you that we felt confident our balance sheet and underlying business would take steps necessary to bolster that confidence, and we did. We told you that we would continue to lead the market on launching new and innovative legal and regulatory AI products, and we did. We will continue to deliver and exceed expectations through sound management, innovative product development, and strategic execution. These are the foundational elements in place today that serve as a platform for our transformation in 2024 and a return to accelerating growth next year and beyond. We remain committed to building a durable, profitable compound and growth company that provides unique value to the world's most important decision makers in scaling this business to $250 million, $500 million, $1 billion in recurring revenue. Now, let me turn it over to Josh to discuss the specific elements of our growth reacceleration plan and our strategy for profitable growth moving forward.