FiscalNote Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 11 speakers on the call.

Operator

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 speakers' remarks, there will be a question and answer session.

Operator

Thank you. And I will now turn the conference over to Sarah Buda, Vice President of Investor Relations. You may begin.

Speaker 1

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 fiscal year 2020. Our actual results could differ materially from expectations reflected in any forward looking statements.

Speaker 1

For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available 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 portions of our website fiscal note 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.

Speaker 2

Thank you, Sarah. On today's call, we review our Q2 results, our outlook for the remainder of the year fiscal year 2020. And discuss our durable compounding revenue, strong gross margin and the macro trends driving our business. I'll also talk about our Q3 guidance fiscal 2020 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 fiscal note and reflects the hard work of the entire fiscal note team to be able to achieve this ahead of schedule.

Speaker 2

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 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 fiscal year 2020, political and macroeconomic information and analyze the impact on their organization. Changes in policies, regulations and laws impact of decision making of almost every organization around the world.

Speaker 2

With our proprietary AI capabilities, we aggregate, synthesize and analyze Mass amount 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 the major corporate customers, including more than half the Fortune 100. These customers rely on fiscal note every day to discover, fiscal year 2020.

Speaker 2

We will now begin the process and navigate the impact of government policy making 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 Markit, FactSet, Morningstar, CoStar and Avalara fiscal year 2020. Fiscal continues to deliver mission critical information that has a direct impact on our customers' operations.

Speaker 2

We've invested tens of 1,000,000,000 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 We are in a unique position and have a clear competitive advantage. Now let me start with a summary of our strong Q2 results fiscal year 2020. And 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 $32,800,000 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.

Speaker 2

We also enjoy consistent high gross profit margins. Q2 adjusted gross profit margins were 80% in the quarter. Fiscal year. These margins are a hallmark of fiscal nodes 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 4,300,000 Also in line with guidance.

Speaker 2

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 fiscal 2020 and generate free cash flow in the near future. Our cash position at the end of the quarter was $38,100,000 fiscal year. We have $94,000,000 additional debt capacity subject to conditions. We continue to have sufficient capital to fund our growth.

Speaker 2

And as we stated, we are fully capitalized and do not require any additional capital raises to fund operations. Turning to management KPIs, we delivered run rate revenue of $135,000,000 Our ARR was $120,000,000 growth of 16% year on year total and growth of 7% on a pro form a basis. Fiscal year. 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%.

Speaker 2

John will provide details on all our Q2 financials and KPIs as well as our outlook for the second half, fiscal year 2019, 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 remains 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, fiscal year. As we look to the full year, we provided guidance for 2023 GAAP revenue to be $136,000,000 to $138,000,000 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 $143,000,000 to $150,000,000 for the year, an updated range driven in part to the company's decision to sunset revenue for select unprofitable products and take other actions to optimize long term profitable growth.

Speaker 2

Fiscal year. 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 fiscal year. Our guidance and continued performance are driven by our compounding revenue growth, fiscal year 2020. Now let me touch on some favorable dynamics that serve as a backdrop for our growth fiscal 2020 and fiscal 2020. 1st is the large market opportunity we operate in and our unique position in the sector.

Speaker 2

Increasing regulatory, geopolitical and macroeconomic and operational risks are top concerns among CEOs and leaders of government organizations alike. New regulations from the U. S. 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 fiscal year 2020. This in turn creates uncertainty for all organizations and significant top line and bottom line impact fiscal note, organizations face a manual, complex and expensive and inefficient process Tracking, assessing and taking action on regulations and geopolitical issues.

Speaker 2

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, fiscal 2019. This forms the basis of our market leadership position the underpinning of our durable growth strategy. As we said, we serve 3 primary groups of customers: government organizations, Corporate Enterprises and Non Government Association. Among these, large enterprises have been our largest fastest growing customer base.

Speaker 2

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 datasets, products and users across the customer's organization. From a large energy company who is extending their physical coverage across 50 states into additional priority global markets to a new opportunity with a large healthcare company fiscal year. 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.

Speaker 2

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 fiscal year 2020. 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 fiscal can address fiscal year 2020 with our unique and proprietary products and data sets. Additionally, fiscal is constantly searching for new customer segments that drive growth as well.

Speaker 2

As an example, the European market stands as one of our most regulated markets in 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.

Speaker 2

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 your risk can materialize. This empowers large organizations in the private and public sectors to anticipate, understand, quantify and track risks emanating from their operations 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.

Speaker 2

In addition to our recent partnerships with OpenAI and Bard by Google, In Q2, we established collaboration with Microsoft to develop a plug in for Microsoft's new AI powered bay. This enables Bing customers to access select Cisco's datasets and content. Like other partnerships and collaborations, this enables fiscal to capture critical insights and how users engage generative models to 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 integration with large language model providers like Microsoft and Google complements 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 at GPT, which we developed internally.

Speaker 2

Fiscal at GPT was built leveraging the decade long investment in AIML and NLP in the legal industry, drawing on the company's existing operations in data ingestion, collection, cleansing and curation full and extensive archive of legal and regulatory datasets 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. Frisco has developed a domain specific approach to fiscal and GPT fiscal 2020. To specifically address the unique complexity that exists in the legal and regulatory world and believe that as it further develops fiscal GPT, fiscal 2020. It will become critical for customers across the legal, policy and regulatory industry with the application of development into the broader industry.

Speaker 2

Among its initial capabilities, Sysco insists 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 the company's comprehensive data and insights and content. Jitsumilla plans to incorporate physical and GPT into its continuous innovation roadmap to support customers deliver new AI driven capabilities in its workflow and data solutions. In addition to assisting fiscal and its core products and improving the experience of existing fiscal and customers, Fiscal Year 2, such as question and answer systems, summarization and sentiment analysis. Fiscal plans to leverage fiscal GPT for key partnerships fiscal year 2020. And find new revenue streams via APIs to advance the use of its models in the broader industry fiscal 2020.

Speaker 2

Fiscal and 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, 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 company to our own fiscal GPT products. Our broad and deep AI expertise in legal, policy and regulatory data is advancing our leadership position fiscal 2020. As a result, fiscal is now positioned better than ever and better than anyone to build a category creator, fiscal year, which consistently innovates to turn insights into actions, convert challenges into opportunities and mitigate risks to protect operations.

Speaker 2

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 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 FinTech 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.

Speaker 2

We are building new partnerships that will help us secure large scale multiyear 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, fiscal year. Including sunsetting of our underperforming products, and we have adapted our expectations for 2023 run rate revenue accordingly.

Speaker 2

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 our new customer segments, new product lines and new offerings. So We can expand the value we deliver to our 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.

Speaker 2

Fiscal 2020. We are positioning the company for reaccelerating growth and industry normative profit margins in the long term. Before I turn it 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 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.

Speaker 2

Our sales and marketing teams are now aligned and support growth. Our G and A is built with opportunity for efficiency. Our R and D expenses are benefiting from our unique and defensible AI, which 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.

Speaker 2

Fiscal year. 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.

Speaker 3

I am proud of the

Speaker 2

hard work of the Physical Home 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 to 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 flow 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%.

Speaker 2

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 fiscal year 2019 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 $200,000,000 $300,000,000 $500,000,000 $500,000,000 $1,000,000,000 in recurring revenue and beyond.

Speaker 2

Now let me turn it over to John for details on the financials and our outlook going forward.

Speaker 4

Thank you, Tim, and good morning. I'm going to spend some time providing further details on the quarter. I'll also fiscal year. Let me start with revenue. 2nd quarter GAAP revenue was fiscal fiscal year 2019.

Speaker 4

Fiscal year 2020. We continue to deliver solid organic growth, complemented by accretive strategic tuck in acquisitions. This has been our track record and we expect to continue this revenue performance moving forward. 2nd quarter subscription revenue, which makes up 90% of our total revenue, was $29,500,000 This is an increase of 21% from a year ago and 9% on an organic basis, excluding the non cash deferred revenue adjustment fiscal 2020 2, once again showing our strong recurring revenue model. Our advisory and other revenue was $3,400,000 $500,000 increase year over year.

Speaker 4

We exited Q2 with run rate revenue of $135,000,000 in total, fiscal year marking 17% year over year growth. Run rate revenue is defined as ARR 51% plus non subscription revenue earned during the past 12 months. It is a key management metric and serves as a baseline for subsequent quarters and beyond. On an organic basis, run rate revenue is $126,000,000 reflecting 6% growth on a pro form a basis fiscal 2019 as defined in our press release. NRR or net revenue retention for the quarter was approximately 98%.

Speaker 4

As we've said, NRR rates are highest among large enterprise accounts. Enterprise's strategic accounts now represent our largest, fastest 5th largest growing highest retention customer group. We have recently taken steps to allocate more sales and marketing resources to large strategic accounts and expect this to drive increase in total NRR. We grew total annual fiscal year 2020, an increase of 16% compared to the same period in 2022. Organic ARR as defined was $113,000,000 as of quarter end.

Speaker 4

This represents a 6% growth rate when compared to our ARR in Q2 of last year on a pro form a basis. Fiscal year. As we've said, we anticipate the most ARR growth will take place in the second half of the year, reflecting our usual seasonality. Looking at gross profit, we continue to enjoy strong margins. Our Q2 gross profit was $23,400,000 fiscal year 2020.

Speaker 4

Our 2nd quarter non GAAP adjusted gross profit was $26,400,000 fiscal year 2020. Total operating expenses, fiscal year. Excluding the cost of revenue grew approximately $4,600,000 year over year excluding non cash stock based compensation expenses. Of that, acquisitions accounted for approximately $2,000,000 in

Speaker 5

the year over year increase.

Speaker 4

Sequentially from last quarter, fiscal year. Total operating expenses declined about $2,000,000 excluding non cash stock based compensation and other non cash expenses. Within OpEx, sales and marketing costs were $11,700,000 for the quarter, an increase of $1,300,000 fiscal year over year largely due to acquisitions, but a decrease of $600,000 from last quarter as we realigned sales structure as Kim referenced. R and D expenses were $4,500,000 a $700,000 increase from last year, fiscal year. A reduction of about $600,000 from Q1, due in part to increased efficiencies.

Speaker 4

Editorial costs were approximately $4,800,000 a $1,400,000 increase year over year, partially driven by acquisitions fiscal year 2019. G and A expenses for the quarter were $16,200,000 fiscal year 2020. An increase of $6,000,000 from a year ago, largely driven by an increase in non cash stock based comp expense of approximately $4,000,000 fiscal year. Excluding non cash stock based comp, G and A was approximately $11,600,000 an increase of about $2,000,000 year over year, fiscal year 2019. Largely due to public company costs.

Speaker 4

Looking sequentially from Q1, G and A declined by almost $1,000,000 fiscal year 2019. Reflecting some benefit from our cost reduction plans, Q1 expense seasonality and lower stock based comp expense. The The operating loss for Q1 was $17,000,000 in total. This includes $6,000,000 of stock based comp. Our total interest expense was $7,200,000 Of this, cash interest expense was $5,200,000 fiscal year 2019, which is a good proxy for our quarterly cash interest expense going forward depending on rates.

Speaker 4

We also recorded a non cash loss of $3,500,000 related to our exchange agreement with GPO, a pre listing note holder. In this agreement, we canceled a number of shares held by GTO in exchange for issuing a new note under the terms previously disclosed. The GAAP net loss fiscal Q2 was $30,900,000 which is reconciled to our adjusted EBITDA loss of $4,300,000 in our press release. Our balance sheet remains solid with $38,100,000 of cash and cash equivalents as of June 30. We have sufficient capital to fund operations and support our growth initiatives.

Speaker 4

Our operating expense reduction plan is driving $9,000,000 to $10,000,000 of in year cost savings fiscal year 2020, an annualized savings of $18,000,000 to $20,000,000 These actions helped improve our adjusted EBITDA in Q2. Given our positive trajectory, we have pulled forward our profitability goal. Fiscal Note will now reach the inflection point of adjusted EBITDA profitability Q3, 1 quarter ahead of previous guidance. This brings me to our guidance. For Q3, we expect revenue of fiscal year 2020.

Speaker 4

$34,000,000 to $35,000,000 And we expect positive adjusted EBITDA of $200,000 to $1,000,000 This is an improvement over our prior guidance to be roughly breakeven in Q3. For the full year, we are providing guidance, fiscal year, including GAAP revenue of $136,000,000 to $138,000,000 marking growth of 20% to 21% year over year, fiscal year 2019, including the acquisition of Dragonfly. This is consistent with our prior range and more narrowed to reflect our current visibility. Run rate revenue of $143,000,000 to $150,000,000 representing growth of 13% to 18% over 20 22, fiscal year. We are not achieving sufficient revenue conversion to merit continued investment and the short term impact of a decision to realign the sales team for greater efficiency and increased focus on large enterprises.

Speaker 4

Ultimately, these decisions position the company to accelerate long term profitable growth. We expect adjusted gross margins to continue at approximately 80%, a full year adjusted EBITDA loss between $8,000,000 $1,000,000,000 As Tim mentioned, our year end guidance implies a positive adjusted EBITDA margin of 7% to 12% in the 4th quarter, Remarkable improvement from the Q1. We look forward to reporting these results early in 2024. As we continue to deliver strong 80% adjusted gross profit margins, leverage the operating platform we have in place And continue to manage our costs. We expect to drive strong conversion of incremental revenue to adjusted EBITDA.

Speaker 4

As we reach the inflection point of adjusted EBITDA profitability, operating leverage will enable us to deliver positive free cash flow margins fiscal 2020 and fiscal 2020. Our lenders remain flexible and are supportive of the company's focused strategic acquisition program. We have approximately $94,000,000 of debt capacity subject to certain conditions. We will continue to pursue selective M and A opportunities fiscal year 2020 that are accretive to growth and profitability. And of course, given our stock price, we are focused on transaction structures heavily weighted to earn outs in structured stock consideration with terms that give long term upside with minimal dilution.

Speaker 4

In closing, Management continues to deliver compounding top line growth as we drive to become a profitable business providing mission critical solutions to the world's most important decision makers. There are secular trends propelling our business and creating sustainable demand. We continue to leverage our investments in AI to drive new growth opportunities and drive efficiencies throughout the organization. With recurring revenue, strong adjusted gross margins and ongoing cost management, we are pulling forward our adjusted EBITDA expectations fiscal year 2020. And now expect to be adjusted EBITDA profitable in Q3, a quarter earlier than expected.

Speaker 4

Fiscal note and we have the operational structure and capital to scale fiscal note and drive long term value. With that, I will now open up the call to questions.

Speaker 5

Fiscal year.

Operator

And we will take our first question from Mike Latimore with Northland Capital Markets. Your line is open. Great.

Speaker 4

Thanks a lot.

Speaker 6

Yes, congrats on the strong results and outlook here. As you look to the second half of the year here, bookings obviously tend to be higher than first half. I guess, the pipeline coverage relative to your expectations, how is that looking? How does it compare to prior years?

Speaker 4

Hi, Mike. It's John Slabaugh. Thanks for the question. Regarding pipeline, I've got Josh Resnick here and he works closely with Ray Chanel. Let him take that question.

Speaker 7

Yes. Hey, Mike, thanks for the question. So, yes, pipeline so far into Q3 is looking promising. We as we've talked about, We've made some changes in the sales organization, which we think are going to be driving higher productivity, both in terms of how the teams work and in terms of the sectors that we're focused on. So right now, we're feeling good about where we're heading for the second half.

Speaker 6

Great. And within that pipeline, maybe can you talk a little bit about the vertical mix? Is it looking more like enterprise here, commercial versus government? And then also anything

Speaker 7

Yes. So It's a balance of private sector and public sector, enterprise and public sector. We are In macro environment like this, it's always a little more challenging on the new logo side as compared with retention. But we're seeing but we're still seeing, all things considered, some good growth on the new logo side. Sorry, Mike, but I may have lost track.

Speaker 7

What was the rest of your question?

Speaker 6

Just wondering if the pipeline mix of new logo versus upsells has changed relative to say prior years?

Speaker 7

No, I mean it's relatively steady compared to prior years. Like I said, in this macro, new logo is always going to be a little harder Then retention, but it's relatively consistent.

Speaker 6

Okay. And then just on the Risk Connector, very interesting launch. How is the pipeline looking for that? What kind of deal sizes are you seeing? What What kind of verticals are interested?

Speaker 7

Yes. So we're actually seeing a good pipeline build there and a pretty broad pipeline. The product is applicable across industries. So we're feeling good about where That's going and we expect deal sizes to be relatively large compared to our average ACV. We've got multiple pricing tiers in play, fiscal quarter, but generally expect a lot

Speaker 2

of these deals to be 6 figures. Hey, Mike. Just something Just kind of jump in with your going back to your last question. We kind of alluded to this in the earnings kind of script earlier on in the call, but we are seeing very good traction with our largest enterprises. And a lot of that is being driven by our NRR rates in that large enterprise group.

Speaker 2

So, we're talking Fortune 100, Fortune 500 businesses that are seeing quite a large amount of expansion By adding new data set, adding new kind of capabilities onto our platform. And so, even in just Q2, we saw pretty large expansionary wins pretty much across the board in retail, manufacturing, energy, healthcare and other sectors. So as those large enterprise customers continue to compound and add new capabilities, we could expect that over time, A larger mix of our underlying revenue should be coming from those larger businesses overall.

Speaker 4

All right. Makes sense. Thank you.

Operator

We will take our next question from Richard Baldry with ROTH

Speaker 5

Thanks. Can you maybe talk a little bit about on the AI side? I get the odd question where people say, well, won't AI make fiscal note. And I think the obvious the answer is no, but I think hearing it from you will probably help alleviate any confusion around

Speaker 2

Yes. So the way we think about it is two fronts, right? So, can we automate some of the things that we're doing already within our operating expenses using AI. And so, there are areas for instance fiscal year end customer acquisition or in data acquisition, things like that, where we're retooling some of our internal kind of capabilities. Specifically with an R and D, I think that we have seen our market leadership extend ourselves largely because the partnerships we've executed with OpenAI's Chat, GPT, Google BARD, Microsoft, Bing, so on and so forth.

Speaker 2

And those things sort of enable us to be able to reduce our R and D expenses by sharing the load with these large language models and the like. And so that's why you're seeing this reduction in R and D expense relative to operating expenses. Now those are all those are obviously nice to have some things and obviously drive some level of profitability. But at the end of the day, we need to build a great business. And a great business is determined by having a great product.

Speaker 2

And so, for us that you can sort of see that in, for instance, the launch of fiscal and GPT, where we're combining all of our data, the decade long investment that we have in legal regulatory information, And then

Speaker 8

the ability to be able to kind

Speaker 2

of combine that with our own language models to be able to create things like question and answer systems, summarization capabilities and other things That are unlocking new capabilities overall. So, it is this combination of sort of reducing operating expenses and also creating new capabilities that I think are just unparalleled in terms of the ability to be able to create

Speaker 5

And can you talk about whether this rapidly emerging AI thing and fiscal year. There's a lot of technology shifts going on. Do you think it's causing any confusion that's slowing sales cycle? Or do you think it's just broadening the sales pipeline because

Speaker 2

I think that we are adding value to the customers that we have today, And also expanding what we are capable of doing with new customers, right. So, our existing customers are going to benefit from The ability to provide summaries and create automated insights and things like that. The ability, for instance, to Fill up a word document and automatically populate entire summary of regulatory context immediately. But at the same time, these capabilities are also enabling us fiscal year 2020. So Risk Connector is a great example.

Speaker 2

On fiscal note, we've historically have not played fiscal year 2020. And now we are, because we can leverage the data that we have, create new software and enter the market, kind of supporting a new buyer within the enterprise, folks who focus on sustainability, focus on supply chain risk and so on and so forth. And so, it's this combination of AI, carbon innovation that drives new total addressable market that drives Really new revenue opportunities for us overall.

Speaker 5

And you called out the sort of mismatch between how over regulated Europe maybe versus the contribution of revenue. So how do you feel about your international sales capacities, headcount, efficiencies they've gotten up to, the reach they've got, and do you think you're even in where you're being careful on costs you'd be adding over there? Thanks.

Speaker 2

We are definitely in the early stages of growth in Europe and Asia. And I'll let Josh kind of compound up on this a little bit. But As I mentioned, 13%, 14% of our revenue today comes from the European market, a substantially lower portion of that comes from Asia. We are expanding definitely in each of the country markets and European market. Obviously, we are in the early stages and so we're Still building infrastructure capacity, but we're doing it in a very thoughtful way that drives sustainable compounding growth And enables us to sort of build that long term infrastructure.

Speaker 2

But I don't know, Josh, if there's anything else you want to add on your end?

Speaker 7

Yes, sure, Tim. I can Generally speaking, we are seeing strong demand for our products in Europe and Asia. We see a lot of opportunity for growth there, both organically and inorganically fiscal year. We have strong basis of operations in both areas. We have offices

Operator

We will take our next question from Matt Van Vliet with BTIG. Your line is open.

Speaker 9

Yes, thanks. Appreciate the time this morning. Just maybe one more on a little bit of Additional commentary on the AI front. Obviously, it's been embedded in the platform in a number of ways and fiscal note GPT, Do you expect to have more sort of directly generative AI or other kind of AI focused products To delineate the fact that this is a way to monetize something you have tremendous expertise in. We see the partnerships with Google and OpenAI, or is this Kind of the extent of what you'd expect on a product road map, it really is kind of leaning into just further embedding it in more functionality across fiscal

Speaker 2

year. Yes. So, just to touch base a little bit on that fiscal GPT point. Fiscal year 2020. It's the 1st proprietary platform incorporating generative AI and large language models for Legislative, statutory, regulatory and policy information.

Speaker 2

And like other generative AI systems, the interaction with customers such that it enables them to identify emerging concerns or generate new insights, summarize timely issues. We view these things in the long term as table stakes. They need to be embedded in our platforms, because customers are going to expect it. I do think that fiscal GPT is an interesting opportunity in the sense that it is a platform in and of itself. And so The ability for instance to leverage our language models, for instance, in partnership with other software companies, for them to be able to leverage our API, For some people to build the application above office, those are all new capabilities and new revenue streams that we see in the mid to long term.

Speaker 2

And so It's not just the platform that we're and the applications that we're delivering for our customers, but what we're doing with this product launch essentially is creating a new technology platform around legal and regulatory capability for other partners in ecosystem to kind of participate in overall.

Speaker 9

Okay, very helpful. And then as you look at The products you talked about, sun setting, any specifics you can share around which products or maybe more importantly, What's the exact revenue impact is this year versus the previous plan and maybe but more importantly, fiscal year 2020. How does this impact growth or how much of a headwind to growth does it present in fiscal 2024, understanding that focusing Resources is key here, but just kind of wanting to make sure we're adjusting our core models appropriately.

Speaker 2

Yes. So I'll kind of Start off and then I'll pass over to John and Josh here. But what I would say philosophically is that at our company, we look at every single product line line it up against gross margin, EBITDA impact, growth potential and then we dynamically allocate capital. So In our case, mostly people and technology resources against the products that grow the facets and have the most profitability potential. So from time to time, what we're going to do is we're obviously going to reallocate capital into things that we're seeing are growing faster in the market.

Speaker 2

So for instance, if we saw risk connector was going very, very quickly, we'd pull sales and marketing R and D resources off of different products And throw it into Risk Connector to try and drive more growth and more profitability. And so, we do have a high degree of visibility on GAAP revenues fiscal year 2020 on an ongoing basis, and that's largely because of the way that we recognize revenue. But subsetting different product lines or allocating capital on different product lines will probably create some level of variability on run rate revenue largely because of the way that we kind of recognize ARR and the like. And so I do think that we are going to continue to be very dynamic. But as we said before, the focus that we've had on profitability override Everything at the current moment as we're trying to drive that double digit EBITDA margin adjusted EBITDA margin and grow into the future.

Speaker 2

But I don't know, Josh, John, if you wanted to add anything fiscal

Speaker 4

year. Sure. I'll put a little bit of a finer point on it. We made the disclosures around the impairment charge we took on equilibrium ESG product. We feel like our ESG portfolio is strong and still think that's a growth area for the business long that benchmarking tool just didn't have the traction that we wanted to see.

Speaker 4

So we decided to kind of focus in other areas. That will have an impact, which is partially a contributor to why we narrowed the runway revenue range for the end of the year, But ultimately feel like the realignment of the sales force, generally focusing on large enterprise will make up for that and more as we

Operator

and we will take our next question from Rudy Kessinger with D. A. Davidson. Your line is open.

Speaker 8

Great. Thank you. I want to dig into the assumptions in the guide in the second half. What are you assuming as far as close rates and sales productivity? Are you assuming improvement In terms of showing an acceleration in growth on a year over year basis, you're about the only public software company that I'm aware of that's guiding to that in the second half of this year.

Speaker 4

Thanks, Rudy. And what I'll say is we look closely at prior years as precedent to determine kind of fiscal year. We expect the close rates to be in this 3rd and 4th quarters. We've put forward a range based on kind of the midpoint of what we saw in prior 2 years and feel like the pipeline coverage, as Josh talked about, can validate those assumptions

Speaker 8

Okay. And then Just on cash flow or cash burn in the second half, how should we think about that relative to you've got about 10 point $1,000,000 in cash interest expense in the second half or maybe put differently, where do you envision your cash balance bottoming?

Speaker 4

The seasonality of the cash is such that kind of the end of December is a low point and we have significant collections in the first quarter and we see that kind of being no different this year. I don't we're looking at cash models pretty closely, I haven't really provided any kind of specific guidance around the cash balance at the end of the year, but feel like it's certainly adequate to Meet all the requirements we have, provide a level of safety and security as we operate going forward and we'll continue to rebuild fiscal year 2019 Q1 of next year. Obviously, as part of this, our filings, we look closely at go forward cash positions and comfortable with where we stand.

Speaker 8

Got it. Thank you. That's it for me.

Operator

And we will take our next question from Mike Albanese with E. F. Hutton. Your line is open.

Speaker 10

Yes. Thanks for taking my questions. Kind of want to build off the last regarding cash, cash burn and then this kind of relates to, I guess, the product pipeline as well. But Obviously, you've launched a number of new products, new partnerships, some additional patent wins. Essentially, you're continually innovating.

Speaker 10

I mean, what can you tell us as that relates to Kind of your capital expenditure and R and D moving forward and maybe you can give us a little bit more color on your expectations into the back half of the year or into 2024.

Speaker 4

So our cash capital expenses have been running kind of in the neighborhood of $2,000,000 per quarter. We don't really We are Capstone, a number of kind of internal projects that we've been working on over the last 18 months. I feel like fiscal year 2020. As we bring those to market, the expenses will begin to kind of come down. Obviously, we've given some guidance around the interest cash interest expense as well.

Speaker 4

Other than that, those are kind of the 2 big ones. And then as source of cash. We look at growing subscription income as source of additional cash as deferred revenue balances continue to increase.

Speaker 8

Okay. Thank you.

Speaker 4

Is there anything you're looking for, Mike?

Speaker 10

Yes. That's helpful. And then Just lastly, and this is more of a general question here. Obviously, you moved up. Your expectations of profitability or at least on an adjusted EBITDA basis You got a chance to really take a look under the hood over the last few quarters here.

Speaker 4

I'll let Josh really dig into the details here. I think it's been a good process for us to go through. It gave us an opportunity to kind of look through the multiple acquisitions we did for ways to bring efficiency to the organization. We also focused on some of the legacy operations and ways to integrate more seamlessly. They will continue to do that going forward.

Speaker 4

Josh, I don't know if you want to add on to that.

Speaker 7

Yes, sure, John. Yes, so Mike, I mean it's really been top to bottom review of our entire organization and all our operations. And as Tim said before, it's about a realignment around sustainable and profitable growth. And so, it's been a matter of shifting resources to areas of highest potential, enterprise being a core segment for us, but also the new products that we've launched like Risk Connector. And then that aren't in line with that profitable growth profile that we're seeking.

Speaker 7

We've made changes throughout in terms of how the teams operate, FinTech model throughout, and I think that it is providing us with a better platform for growth for the future in addition to Driving that profitability.

Speaker 10

Got it. Well said. Thank you for taking my questions and congrats on the next quarter.

Speaker 8

Thank you.

Operator

And we will take our final question from Zach Cummins with B. Riley Securities. Your line is open.

Speaker 3

Yes. Thanks. Good morning. Thanks for taking my questions. Can you guys build a little bit more fiscal year 2020.

Speaker 3

Upon kind of the reallocation of resources within the sales force, kind of what were really some of the key Changes that you made in terms of go to market approach and kind of what you've been seeing from those incremental changes here in the last couple of months.

Speaker 7

Sure. This is Josh. I can take that. So as we've discussed, a lot has shifted So adding a new strategic accounts team to go after the largest accounts, shifting some resources away fiscal year 2020. We have realigned our account management and customer success teams To better drive retention and upsellcross sell.

Speaker 7

We have We've also focused a lot on improved sales operations and sales enablement. So having that kind of operational engine behind it, Being really finely tuned to be able to drive the entirety of the organization forward. And having our new Chief Revenue Officer, Rich Henderson come in and establish a really strong leadership over the organization and a real direction towards scaling the profitable growth that we've talked about. And I'll add to, while we've gone through a significant amount of change already, we still have initiatives underway around optimizing things like pricing, bundling and packaging the products to even further drive growth and further drive that upsell and cross sell, continuing to improve our efforts on account management and customer success, And then leaning further into things like partnership strategy, which Tim spoke about earlier and we've talked about previously With things like our relationship with Peraton, we're already seeing some traction and Continuing to go further into partnerships as well.

Speaker 3

Understood. And final question for me really It's just around kind of overall customer sentiment. I mean, have you seen any material change in terms of buying patterns from especially kind of your enterprise customers and government agencies here in the last couple of months maybe versus what you saw beginning of this year or end of last year.

Speaker 7

Yes. I would say that in terms of what we've seen in terms of sentiment, I would say fiscal 2020. On enterprise side in particular, we've continued to see consistent with what we've talked about in past quarters, we've continued to see some budget challenges A lot of strength and resilience in our core policy products and in our community offerings. We're seeing strong demand for our Security Intelligence out of Dragonfly. A lot of interest, as I mentioned before, across the board, across sectors in Risk Connector.

Speaker 7

Fiscal year. So, what we're seeing, large enterprises are having increasing concerns about vulnerabilities in their supply chains and the risk associated with it. And I'd say we're also seeing enterprises turn to us for combined intelligence that we can offer around geopolitical, macroeconomic and security issues because Those are all intertwined for a large enterprise. And so, we have clients who are focused on, we have a large Fortune 500 Global manufacturer who's been concerned about tensions with China and Taiwan. And so looking at related policy implications, fiscal year 2020.

Speaker 7

Potential impacts from sanctions and tariffs and looking for a macroeconomic view as to other regions where they can invest now to offset negative impacts. So bottom line is, we are seeing large enterprises with a lot of concerns about what's happening globally and trying to make plans

Speaker 3

Understood. Well, thanks for taking my questions and best of luck with the rest of the quarter.

Speaker 4

Thank you.

Operator

And there are no further questions at this time. I will now turn the call back to Mr. Tim Huang for closing remarks.

Speaker 2

Great. Thank you everybody for jumping on the call here. And we look forward to

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FiscalNote Q2 2023
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