FiscalNote Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 11 speakers on the call.

Operator

Good morning. My name is Aaron, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the Fiscal Note First Quarter 2024 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session, and we'll provide further information on that point.

Operator

With that, we can now begin today's call. I would like to turn it over to the

Speaker 1

Good morning. My name is Bob Burrows. I'm with Western Avenue Advisors LLC, which was hired in April as an Investor Relations Consultant to the company following Sarabhuda's recent departure. I look forward to speaking to and being a resource for the company's investor stakeholders in the days, weeks and months ahead. Thank you all for joining the call today as we discuss fiscal note's Q1 2024 financial results.

Speaker 1

With me on today's call with prepared comments are Tim Huang, Chairman, CEO and Co Founder and John Slabaugh, CFO and Chief Investment Officer. Other members of the senior management team will be available during the Q and A session that will follow these prepared comments. Please note a slide deck specific to the Q1 2024 results and intended as a supplement to the earnings release as well as the forthcoming prepared comments from management is available on the company website. In terms of important housekeeping, it is important to mention the following. During this call, we may make certain statements related to our business that are forward looking statements under federal securities laws.

Speaker 1

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 discussion of the material risks and important factors that could affect our actual results as well as the risks and other important factors discussed in today's earnings release, please refer to our SEC filings, which are available either on our company website or the Securities and Exchange Commission's EDGAR system. Additionally, non GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release or the accompanying slide deck for this call, both of which are available on the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measures. Finally, we use key performance indicators or KPIs in evaluating the performance of our business.

Speaker 1

These include run rate revenue or RRR, annual recurring revenue or ARR and net retention revenue. Again, please refer to the earnings release or the company's slide deck for this call for definitions of these important metrics. And with that, I'd like to turn the call over to fiscal note's Chairman, CEO and Co Founder, Tim Huang. Tim?

Speaker 2

Thank you, Bob, for that introduction, and thank you all for joining us this morning. It's great to be with you today to discuss our Q1 2024 results and provide an update on the state of our overall business. We'll also offer some perspective on our strength and balance sheet position and profitable growth with the recent divestiture of a non core business as well as elaborate on our product strategy and our commitment to driving strong return on invested capital. I always look forward to these opportunities to connect with our shareholders and share with you the exciting developments of fiscal note. First, let me remind you of some of the core fundamentals of fiscal note.

Speaker 2

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 analyze the impacts on their organizations. We are the market leading AI platform for the regulatory, legislative policy and geopolitical intelligence sectors, ascends to the Bloomberg Terminal for regulatory, legislative and strategic risk, drawing upon a deep reservoir of technical expertise, proprietary data and analytical tools. Our proprietary high quality and authoritative data on a range of aspects include international, federal, state and local legislation across 80,000 cities, all 50 states and every major federal regulatory agency, as well as deep profiles of tens of 1,000 policymakers, millions of legislative and regulatory booths and purpose built analytical tools monitoring governments around the world that have enabled fiscal note to build a market leading position across thousands of customers. Many of our assets, including CQ serve essentially as the Dow Jones of legislative and policy worlds, providing deep domain expertise with proprietary data. CQ as an example has been providing Washington with information about congressional votes, budgets and congressional information since 1945.

Speaker 2

We operate in a large and growing $40,000,000,000 addressable market driven by increasing global uncertainty as well as operational and regulatory complexity that impacts almost every organization from governments and non profit organizations through large enterprises who operate in a highly regulated global environment. We have a strong and enduring competitive moat underpinned by our decade long investment in data, AI and human intelligence. Our broad AI leadership in both generative AI and domain specific AI is supported by a deep patent portfolio and is recognized by the world's preeminent AI platforms from OpenAI to Microsoft and Google. 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, elections, global conflicts and macroeconomic shifts on their institutions and more importantly to take actions which achieve their business objectives and minimize political, operational and economic risk.

Speaker 2

This forms the basis 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 datasets, products and capabilities that enhance and expand our customer value. Our net dollar retention has stayed in the high 90s on a consistent basis and our revenue stream is approximately 90% recurring in nature, which provides for a high degree of visibility. We have strong financial momentum supported by healthy compounding top line growth, ongoing adjusted EBITDA profitability and a solid cash position. Our management team has a strong record of innovation and product success that have enabled us to push the balance of the market and be innovative on behalf of our customers.

Speaker 2

We have 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 the business, we expect to deliver long term free cash flow margins in line with other information services leaders at scale. Just as S and P Global, IHS Markit, FactSet, Morningstar, CoStar, and Avalara have innovated in their respective information fields, Cisco is forging a new path for global political, legislative and regulatory policy and market intelligence by delivering mission critical information that has a direct impact on our customers' operations. With our established AI pedigree and our vast array of validated trusted data, we are in a unique position to lead what is an entirely new category within the information service industry. We have a clear competitive advantage to deliver on this outcome.

Speaker 2

With that as a backdrop, let me turn to some of our exciting developments that are happening here at fiscal We kicked off 2024 with a solid start, delivering total revenues of $32,000,000 which was slightly above our previously provided guidance and adjusted EBITDA of just over $1,000,000 marking an important improvement in profitability versus the prior year and in line with previous guidance. This also marks our 3rd straight quarter of adjusted EBITDA profitability as a company. These results reflect the hard work and dedication of the entire fiscal note team as we continue to execute on our mission to deliver critical insights to the world's most important decision makers. Whether it's the Fortune 1 hundred company navigating complex regulatory landscapes or government agencies seeking to understand the impact of policy changes, Chris can move it there, providing the data, tools and expertise they need to make informed decisions. As we entered this year, we did so as a leaner, more focused organization with a relentless commitment to leveraging our decade long investment in artificial intelligence.

Speaker 2

We have launched new products and are optimizing our go to market approaches to maximize the impact of our AI technologies married with our product strategy. This is providing enormous benefit to our customers through enhanced access to our sizable, unique and curated data sets. And while the rest of the industry is now catching up with the power of AI, it's been at the core of what we do at Fiskeland since our founding. To our benefit, we also believe the current generation of AI tools will help us unlock faster, easier and more scalable access for a vast collection of unique data assets. Our proprietary AI capabilities built on a foundation of vast high quality and trusted datasets and deep domain expertise continues to strengthen and amplify our leadership position and drive unparalleled value for our customers.

Speaker 2

From automating the analysis of complex documents and datasets, from our foundation in legal and regulatory, to our expansion into macro and microeconomic data, geopolitical information and operational security, to predicting the impact of policy changes and identifying materialized risks in global finance, security and supply chains. Our AI is transforming the way organizations navigate in increasingly uncertain and highly complex world. So we believe Fiskemote's strategy of investing in proprietary content and deep AI workflows will ultimately come the dominant way that customers will come to navigate legislative, regulatory and political risk in the short, we believe that we are in the right place at the right time. In the Q1, we made significant progress on several fronts. Most notably, we successfully completed the divestiture of boord.org, a strategic move that enabled us to reduce our debt by $65,000,000 and strengthen our cash position by approximately CAD15 1,000,000 2 outcomes that positively impacted our balance sheet.

Speaker 2

This transaction not only enhanced our financial flexibility, but also allows us to focus our resources on our core markets and on offerings where we see the greatest potential for long term growth and shareholder value creation. The divestiture is also a reflection of fiscal note's focus on strong and expanding product level margins. As we gain revenue scale against our fixed operating costs, we anticipate realizing substantial incremental compounded growth in adjusted EBITDA. Having achieved adjusted EBITDA profitability in 2023, we now turn to driving sustained growth in the business. I will elaborate on this in 2 parts.

Speaker 2

The first is in talking in-depth about our AI and product strategy. The second is discussing our operational improvements, which are driving profitable growth. Our fiscal note team has done an excellent job, particularly in new green shoot areas of growth, including our European Policy business and our Security Risk businesses, and we expect double digit growth from both. As these growth areas of our business continue to scale and become larger proportion of our business, We expect their impact to start pushing up our overall growth rates. So let's spend a few moments talking about AI.

Speaker 2

Understanding our AI strategy is critical to understanding where we're going and where some of our growth will come from. I will first talk about where we are then I'll focus on where we're going with respect to our product strategy and our investments in AI. As recognized by OpenAI, Google and Microsoft through our AI partnerships With each of these industry leaders, we are now focused on ensuring that we can surface our AI strategy to as many clients as possible with a goal of driving growth in the future. Our trusted content and information, married with deep subject matter expertise, a leading AI organization and access to thousands of existing customers spanning corporate and government agencies enable Physicula to get the forefront of generative AI. This represents a compelling opportunity to service our product and data capabilities to more users through even more use cases.

Speaker 2

With the goal of providing a deeper dive into AI investments, I'd like to outline 3 stages of development that have allowed us to embark upon our journey into the current generation of AI. Some of these stages are a bit technical, but I believe they're important to outline in order to understand the foundation we have created and what it will enable. For simplicity, I'm going to classify our past 10 years as stage 1. Cisco has spent the past decade aggregating, cleansing and building a massive repository of legislative, regulatory and geopolitical agreement from over 80 different countries. We have spent a considerable amount of resources in developing and maintaining proprietary technology and deep expertise in building a market leader's position in these information fields.

Speaker 2

We have leveraged a range of technologies including data ingestion, ETL pipelines, pre processing, metadata tagging, taxonomy creation, machine translation, data scan creation, etcetera. And we've pointed and geared these technologies towards our industry vertical. We have built a powerful data ingestion platform. We have pioneered a new category and this market leading position has enabled us to service thousands of customers from Fortune 500 Companies to government agencies. Our products analyze political and policy trends and provide us with a unique and unparalleled view into understanding the most pressing regulatory, legal and policy challenges that our clients face every single day.

Speaker 2

The information services market has been making investments in AI at this stage for years. But now with generative AI, we will also see substantial advancements in the use of these technologies such as AI assisted coding to accelerate the acquisition of new information sets and consequently an acceleration in the addition of new product lines. Moving to the Stage 2. In August of 2023, we announced the creation of fiscal and GPT, the 1st proprietary platform incorporating generative AI and large language and health capabilities customized for legislative, regulatory and policy workflows. Sysco's GPT takes public and proprietary legal regulatory and policy data, processes it using some of the most powerful large language model and AI technologies and apply Sysco's long standing expertise in AI and data collection, normalizing it in order to provide users with a reliable, trusted and secure product experience customized to meet the specific needs of the legal policy and regulatory domain.

Speaker 2

The initial capabilities that fiscal and GPT was built to enable include assisting customers by identifying pressing policy and regulatory concerns, generating new insights and recommendations, summarizing timely and relevant issues and finding pertinent answers to information for fiscal note's proprietary databases, consisting of thousands of trusted internal and external sources, which form the basis of fiscal month's award winning, incisis and actionable content. Launching this product in 2023 was an important milestone and it set the stage for our next set of product releases. Critical for our clients is the need for domain specific AI systems that are based on known and accurate data sources. Also critical for our clients is the need for concise responses that do not include hallucinations induced by models trained on data assets that could provide misleading or incorrect responses. Despite the many major advances in AI and the use of LLMs in the technology industry, further domain specific systems are needed to advance the expert use case that our clients require to fund their day to day legal and regulatory analysis.

Speaker 2

Cisco has developed a domain specific approach in building our Cisco and GPT products and we consequently address the unique complex that exists in legal and regulatory worlds and believe that as we further develop the fiscal and GPT, it will become a mission critical service for our customers across the legal policy and regulatory industry. In Stage 3, fiscal in the Q1 of this year successfully completed the creation of a co pilot and reasoning platform that leverages the data from Stage 1 and verticalized LLM to Stage 2 to build extensible and repeatable AI agents and co pilots. As you may know from following other AI industry developments, the ability to deploy agent technology in combination with large language models is fueling significant improvements, especially where deep domain expertise is required. As such, our new platform enables us to do 2 things. First, our product teams can rapidly develop AI agents and AI driven chat interfaces capable of marrying our AI technology, including with Cisco's authoritative content and insights to bring significant productivity benefits for the industry.

Speaker 2

In other words, we created an AI Copilot and Agent Creator. This Copilot Creator allows our developers to create AI agents and enables us to leverage our content information and language models to accelerate our ability to bring generative AI capabilities to our portfolio and market without the added cost of rebuilding our core infrastructure every time we want to release a new product or address a new AI agent or Copilot use case. We have consequently updated our product roadmap to accelerate the launch of these new AI Copilot products, leveraging various parts of our AI Copilot creator that can launch new products on substantially the same code base. In other words, new AI Copilot and AI agents will not be contingent on a massive investment in R and D, and we believe this will drive a substantial increase in our ability to launch dozens of domain specific AI copilots. The second thing that our Copilot creator enables is that because the Copilot creator relies on authoritative information, we're also able to control substantially for hallucinations and other problems with the data to AI space that cannot be obtained from the off the shelf AI models such as CPT-four, Anthropic, Mistral and others.

Speaker 2

In effect, we've created a reasoning engine in the legislative regulatory categories. Our methodology and reasoning engine allows for fact checking of information and limits the exposure of proprietary company data into 3rd party large language models when we leverage them in limited cases, enabling deeper trust of generative AI in our space. Unlike other platforms in the industry that leverage other people's data and other people's AI models, fiscal has built its own engine for collecting information and its own AI models adapted for the legal, legislative and regulatory professions. Fiscal is consequently best positioned to provide AI leadership in the legislative, regulatory and policy fields. Given that we have been in the market since 2013 with our products, given our comprehensive global client base and given that we made a conscious decision to develop deep expertise in data aggregation, AI modeling and key areas like summarization and machine translation, we believe that we are in the right place and at the right time to capture the upside that sits in front of us.

Speaker 2

Today and going forward, Fiskelet will leverage the data from Stage 1, the AI model from Stage 2 and the co pilot and reasoning platform as a service from Stage 3 to begin launching a series of AI CoPilot and agents that collectively will build a powerful legal, regulatory and geopolitical AI assistant and eventually the world's most powerful AI lawyer. Similarly, we will do the same to support adjacent personas across the span of strategic risk and opportunity. The goal here is to capitalize on our decades of data aggregation and deep domain knowledge and launch dozens of these new point solution AI Copiles in and around the legal, regulatory and strategic risk industries and thereby radically transforming the work and productivity of our customers. Fiscal year's new AI co pilot will be revolutionary new AI agents fine tuned for regulatory and risk management professionals to facilitate their day to day work on key paths related to legislation, regulatory compliance, advocacy, constituent communications and global risk. With this, we are launching what we see as an incredibly powerful generative AI platform that can create and rapidly deploy a series of co pilots that can expertly perform time consuming domain specific tasks, free up substantial amounts of time for our customers and provide unique and valuable insights that were not possible before.

Speaker 2

These AI agents are not static and importantly will rapidly improve over time our technology continues to develop and as we deploy our AI based products and services for our extensive client base. We launched our first AI agent, Stress Lens, with the real time ability to quantify the behavioral impact of leading decision makers and influencers across the financial, regulatory and government domain. Stress Lens includes an innovative AI agent capable of detecting changes in tone, cadence and physical movements, deciphering the intricate language of human emotions and the intentions with unparalleled accuracy, while showcasing a groundbreaking leap leap in technology that will revolutionize the way humans interact with machines. Stress Lenses' leading AI technology can now help us understand whether an executive on an earnings call is uncomfortable with their numbers, whether a policymaker is nervous or whether there is a heightened level of discomfort or disagreement on the specific topic along a group conversation. Whether in business negotiations or public speaking engagements, Stress Lens serves as a trusted ally, providing real time insights into the underlying emotions driving human interactions.

Speaker 2

As the world marches towards a future where human AI collaboration becomes ubiquitous, Stress Lens stands at the forefront, spearheading a paradigm shift in how we perceive and interact with technology. Fiskeland has filed a patent on the technology and has also begun exploring making the technology available beyond the legislative regulatory and risk basis to expand the use of stress lens in other AI markets where detecting human emotion is important, such as public relations and media training, witness preparation for litigation, etcetera. The 2nd AI agent, our Global Intelligence AI Coopilot was launched last week. The Global Intelligence AI Powered Assistant was designed to help customers assess the shifting global landscape, manage emerging developments and mitigate risk involved with the world's most pressing geopolitical macroeconomic security and regulatory challenges. Providing macroeconomic and country risk analysis, the Global Intelligence Co pilot spans expert content across our geopolitical, macroeconomic and security and risk portfolio, featuring Oxford Analytica, FrontierView and Dragonfly, and enables fiscal end users to ask questions related to a wide range of issues such as geopolitical market analysis, forecast on inflation and other key macroeconomic indicators, travel risk and advisory, ongoing military conflicts, emerging risk by country and views on the policy impacts of a national election.

Speaker 2

We've begun to turn on this AI capability for our existing customers who are purchasing our geopolitical and macroeconomic intelligence products with an increasing percentage of our users leveraging our AI capabilities each passing week. We expect that these new capabilities will not only drive improved usage, but also increase customer retention and growth in those products as well. Using the data from Stage 1, the AI models from Stage 2, the AI Copilot creator from Stage 3, We are rapidly bringing to market several AI Copilots with various skills. Generative AI is creating a substantial step change in opportunity for our customers to automate large portions of the workflows and drive substantial efficiency. Our copilot vision through 2024 and into 2025 beyond encompasses skills such as the ability to summarize changing legislation regulations from multiple different markets, conduct analysis of changing laws and regulations, create research memos, search existing databases of information, review documents for compliance and risk analysis and various skills that we plan to bring to market over the next several quarters.

Speaker 2

Developing these skills from negotiating market analysis, licensing regulatory drafting and compliance, drafting memos and etcetera will collectively enable fiscal note to build the most powerful legal, regulatory and geopolitical AI system and eventually the world's most powerful AI lawyer. And similarly, we'll do the same to support adjacent percent across the span of strategic risk and opportunity. We are already in market with the first of these solutions and expect to see accelerated development combining our proprietary data information with our AI investments to bring these capabilities to our customers faster. From a go to market perspective, we are leveraging our substantial customer base of thousands of customers to drive Copilot adoption overall and drive a deeper level of workflow integration with our customers. To make our code path more accessible and broaden the lower end of our market reach, we're also introducing a product led growth approach designed to engage individual users regardless of whether or not they are a small business or instead of a large enterprise.

Speaker 2

Our overall goal is to accelerate getting our AI technologies into the hands of our existing and new customers, while expanding the use cases for which our products are used. By way of example, there are almost 500,000 elected officials in the United States from the President to the local city council member and they all need to understand pending legislation and regulations and could consequently benefit from the use of fiscal and AI in their day to day jobs. That segment alone is potentially a $1,000,000,000 a year recurring revenue opportunity. Most importantly, the early response from our recently launched AI products has been extremely positive and we continue to see significant potential to expand these offerings in the coming quarters. In short, we are developing and will be accelerating the use of AI Copilot, leveraging the thousands of existing customers we have, including government clients such as the United States Congress, the White House and the DoD as well as our corporate clients, including many of the Fortune 500 and their legal, legislative, regulatory and policy departments.

Speaker 2

In the long run, our goal is to broaden adoption of our AI enabled technologies by anyone that is in need of global policy and market intelligence. We believe that over the long term, all information services companies from Thomson Reuters, Wolters Kluwer to LexisNexis and others will need to eliminate and transform their existing cloud based workflow solutions to adapt to the changing customer demand of leveraging AI agents to query their systems. No longer will it take 15 clicks on a web app to find an answer to a question. People will be able to simply query the ask, get the results and leverage an AI agent to generate a report or run analysis. This is the future of AI driven information services.

Speaker 2

Additionally, we have been approached by both existing and new business partners to explore data licensing and co selling our Copilot and AI agents. For instance, we are exploring working with some of the large language model companies to potentially license portions of our data with the goal of exposing a large universe of users to our data. Many similar such deals have been struck and announced in the press in recent weeks, and we believe it is a trend we can leverage to expand our market opportunity. In particular, we anticipate that our proprietary data assets are uniquely valuable for such partnerships, and our ability to help our clients see around the corner on regulatory and policy matters will allow us to strike uniquely valuable partnerships. We are also exploring opportunities to leverage our AI agents with the various adjacent sectors ranging from earnings calls to PR agencies to investment banks to provide an ever expanding universe of usage for AI capabilities.

Speaker 2

I mentioned for instance the ability to use Treflan in the witness preparation process or in preparation for giving public remarks in front of Congress, regulatory investigations or the press or in the announcement of earnings calls with various earnings call transcripts and financial data providers. Within the next quarter, we will be showcasing our AI platform and co pilots at an AI Showcase Day we will be announcing in the near term. There, we will further elaborate on the future multi year roadmap we've established as we've built the most powerful legal, regulatory and geopolitical AI system and eventually the world's most powerful AI lawyer. And similarly, we'll do the same to support adjacent personas across the span of strategic risk and opportunity. Having spent the last 10 years in training, gathering and building data for our vertical, we are accelerating the use of these tools to bring new value for our customers.

Speaker 2

We are incredibly excited about the future of automation and autonomy and believe fiscal is leading the way for an AI driven future for our customers across all of the numerous sectors we cover. We expect a combination of improved operating performance, which I'll further elaborate on, reallocation of our resources post Board.org divestiture and the launch of our new AI co pilot to return the company to a run rate revenue growth of low to mid teens as we've enjoyed in prior years. Having elaborated on our AI growth strategy, let me now turn to our operational improvements. Our focus on upsell and cross sell initiatives is ongoing. By aligning our teams and leveraging our AI prowess, we've enhanced the effectiveness of these strategies, which drive higher contract values and deepen our relationships with key accounts.

Speaker 2

We've also made key updates to our CRM and other software tools to better support these efforts, giving our sales and customer success teams the visibility and insights they need to identify and capitalize on growth opportunities. We will continue to add new data and intelligence to expand our customer value. In the past several quarters, we added new geopolitical and security intelligence capabilities through the integration of DragonFly. We also expanded our EU IT offering, providing stakeholder coverage and data for all 705 members of the European Parliament. And finally, we expanded our global policy and analysis coverage to over 80 countries, most recently to include China's national level and provincial level legislative and regulatory policy developments, positioning fiscal note as one of the only providers of Chinese national and provincial regulatory and policy intelligence.

Speaker 2

Our European business now constitutes 15% of our revenues and our European Policy Business and Security Intelligence Platforms and Risk Businesses remain some of the fastest growing in our overall product portfolio, growing north of 20% a year. We continue to explore doubling down in areas of accelerated growth to drive overall growth in the business. Our large enterprise business also continues to grow with meaningful new customers added in the last quarter. As we have doubled down and more heavily invest in larger, more strategic accounts for our line sales growth to go after, we expect bookings growth to accelerate in the second half of the year to align with traditional seasonality and softer buying cycles. To that end, we're streamlining and simplifying our sales process, positioning fiscal as a unified provider of geopolitical and market intelligence solutions.

Speaker 2

By bundling our offerings in this way, we believe we can drive higher customer retention and more durable revenue streams. This is allowing us to bring together our various datasets, analytical tools and workflow solutions into cohesive packages aligned to the key use cases and pain points of our customers. It's about making it easier for them to access the full value of our overall platform and building deeper, more strategic relationships over time. As we look ahead, our path to reaching and maintaining low to mid teen compounded annual growth for 2025 and beyond remains clear. We're committed to executing our long term growth strategy, which centers on deepening and widening our penetration across core customers with our core offerings.

Speaker 2

This means continuing to innovate and expand our portfolio of AI powered solutions, while also investing in sales and marketing to drive new logo acquisition and expand our presence in key markets like Europe, where we have a still nascent foothold, but see significant uptime potential. Cisimab pushed the industry to combine cloud software and international information. We pushed the market to include point solutions like advocacy software bundled with legislative information. We push the market to include a larger and larger amount of information from countries around the world. We have been pushing and leading product innovation for years and we'll continue to do so in the future on the AI front.

Speaker 2

On the strategic front, I want to briefly touch on the ongoing review process. Our recent divestiture unlocked significant value and our Board will consequently continue to evaluate all such strategic opportunities given the continued view that our overall business remains undervalued in this market. The board.org transaction delivered a tremendous return on our initial investment and is a testament to the significant value of but one component of our overall business. The transaction also demonstrates our disciplined approach to M and A and our ability to create value through both strategic acquisitions encompassing both purchases and divestitures. We remain laser focused on driving shareholder value by building a durable and profitable business for the long term, but the Board will also continue to evaluate all options to realize value for our shareholders.

Speaker 2

We have a clear AI leadership position in our industry and it generates consistent recurring revenues from a premier base of global customers. Our business drives consistent 80% adjusted gross margins and has an operational foundation with high operating leverage. We have been profitable on an adjusted EBITDA base for 3 quarters now and our go forward focus remains equally weighted on driving both bottom line profitability and top line growth. In closing, I'm incredibly proud of what the Systema team has accomplished, not just in the Q1, but over the past year. We've emerged as a leaner, more agile organization with a strengthened foundation for long term durable growth.

Speaker 2

Our investments in AI, our focus on operational excellence our commitment to customer success have positioned us to capitalize on the vast opportunities ahead. I believe that the new AI driven future will mean that the old way of analyzing legislative regulatory and geopolitical risk will become obsolete and will drive enormous opportunities for fiscal note. As we move through 2024, we view it as the first step in a multiyear journey to earning our place in the history books and becoming the dominant player in our industry. Our strategy is simple, deep and wide penetration across our core customer base with our core offerings, translating into higher revenues and accelerating adjusted EBITDA margins as we realize incremental operating leverage. It's a powerful formula and one that I believe will create significant value for all of our stakeholders in the years ahead.

Speaker 2

With that, I'll turn it over to John Flabaugh, our CFO, for a detailed review of our numbers. John?

Speaker 3

Thank you, Tim. My comments this morning will be brief. So let me jump right in and walk through the numbers for Q1 2024, starting with the income statement. Looking at revenues, total revenue for Q1 2024 was $32,100,000 slightly higher than the prior year period. Subscription revenue during the quarter accounted for 92% of revenue, in line with the company's historical trends.

Speaker 3

Digging deeper into revenue, with respect to our key performance metrics, we experienced some comparison challenges this quarter due to the divestiture of board.org. In Q1, twenty twenty four, run rate revenue was $122,000,000 and annual recurring revenue was $110,000,000 On a pro form a basis, adjusting for the impact of the board.org divestiture, both metrics for Q1 'twenty four were higher than the prior year period. And in Q1 2024, net revenue retention was 96%, a similar level to the prior year. Overall, revenue performance in the quarter reflects increases from organic growth and acquisitions during the prior 12 months, offset by decreases resulting from both dispositions and product discontinuations. Turning to expenses, principal operating expenses in Q1, 2024 decreased versus the prior year.

Speaker 3

Specifically, the cost of revenue decreased by approximately $2,000,000 or 19%. R and D decreased by approximately $2,000,000 or 32%. Sales and marketing decreased by approximately $3,000,000 or 23%. G and A decreased by approximately $2,000,000 or 12%. Generally speaking, the reductions in operating expenses principally reflect cost control measures instituted across 2023 as well as the impact of the sale of boord.org in Sunset Products.

Speaker 3

Looking at our profitability during the quarter, let's start above the line. Gross margins remained strong in the quarter with Q1 2024 coming in at 77% on a GAAP basis and 85% on an adjusted basis, both increases over the prior year period. These improvements were primarily reflect the impacts of Sunset products and improved efficiencies. We continue to pursue incremental efficiencies in our operations. Transitioning to below the line, GAAP net income for Q1 2024 was $50,000,000 an increase of over $68,000,000 reflecting a substantial positive impact of the gain on the sale of board.org during the period.

Speaker 3

EBITDA for Q1 2024 was $65,000,000 an increase versus the prior year and primarily reflecting the impact of the gain from the sale of boar.org. Adjusting for non cash and other non recurring or one time items, primarily the gain of the sale of Board.org, adjusted EBITDA was over $1,000,000 a significant improvement year over year and importantly the 3rd consecutive quarter of positive performance for this key profitability metric. Turning to the balance sheet. At quarter end, we had cash and cash equivalents of $44,000,000 sequentially higher than year end 2023 and slightly lower than the prior year period. As we've reported recently, divestiture of boord.org enabled us to materially improve our capital structure with the addition of $15,000,000 to cash.

Speaker 3

Period end cash also reflects the ongoing initiatives to control spending across the company and prudently allocate capital to investments in the business with the potential for high growth and positive return characteristics. We have sufficient cash resources to fund our operations and we do not see any immediate or intermediate need for additional capital. At quarter end, our total debt stood at $177,000,000 significantly lower sequentially than the level recorded at year end 2023. This amount includes $93,000,000 related to our senior term loan after giving effect of our $66,000,000 principal repayment made during the quarter following the sale of board.org. Simultaneous to that, we also amended our credit agreement with our senior lenders to, among other things, extend principal amortization payments for an additional 12 months now beginning in August of 2026.

Speaker 3

We continue to manage our debt service levels balanced by ongoing investments in CapEx and OpEx. Turning to guidance. Today, we have reaffirmed our full year forecast for total revenues of $123,000,000 to 100 and $27,000,000 total run rate revenue of $126,000,000 to $134,000,000 and adjusted EBITDA of $7,000,000 to $9,000,000 We also today provided the following forecast for Q2 2024. Total revenues of approximately $29,000,000 and adjusted EBITDA of approximately $1,000,000 As a reminder, forecast for both the quarter and full year reflect the impact of the board.org divestiture among other considerations. In summary, the overall performance of Q1 2024 was as expected.

Speaker 3

Our forecast for the 2nd quarter indicates a slight bias towards the second half of the year in terms of our full year ranges, in line with prior year seasonality. As we stated previously, 2024 is a year of transformation and a bridge to revenue and margin expansion beginning in 2025 and leading eventually to our long term run rate revenue targets. The business remains strong. We continue to execute our operational efficiency initiatives in concert with our product strategy, all in pursuit of further strengthening our established position as a critical partner to our expansive global customer base. That concludes my prepared remarks.

Speaker 3

I'll turn it over to the operator to begin the question and answer session. Operator?

Speaker 4

Thank you.

Operator

Our first question for today comes from the line of Tim Moore with E. F. Hutton. Your line is live.

Speaker 5

Hi, everyone. This is Jesse Sobelson on for Tim Moore. Nice to recorder. I see you guys disclosed these annualized KPIs, but would you be able to disclose the revenue contribution from board.org in the 2 months that it was part of your business last quarter as well as the cadence of the $13 or so 1,000,000 last year so investors can calculate the organic revenue growth achieved and what is embedded in forward guidance?

Speaker 6

Sure, Jesse. Those will be disclosed when we file the Q. There will be a bridge.

Speaker 2

Okay, great.

Speaker 7

Thanks for taking my question.

Speaker 2

Thank you. Thank you, Matt Port.

Operator

Our next question comes from the line of Matt VanVliet with BTIG. Your line is live.

Speaker 8

Yes, good morning. Thanks for taking the question. Tim, you outlined a number of new initiatives, obviously, mostly around AI and a number of these co pilots. But how are you balancing the go to market approach internally of sort of more and more products and recently somewhat reduced total force at the company and just sort of how you can keep everyone focused in selling the appropriate products in this current headcount?

Speaker 9

Yes. Well, why don't I start and

Speaker 2

then I can have Josh kind of jump in afterwards as well. I think that from our perspective, what we view generative AI as is essential to delivering for our customers on an ongoing basis. And so, we eventually expect that all of our customers will be using some form of generative AI, whether it's incremental to our existing products or embedded in our existing products. And so we're going product by product at the moment and deciding which product lines will need to have generative AI components embedded in their solutions to really deliver on the service versus which solutions we need to essentially serve essentially as a cross sell or upsell. But it's important to remember that it's all the same thing, right?

Speaker 2

We're using the same data. We're developing these AI models on top of the same data that our customers are already subscribing to and trying to deliver incremental value from these solutions, right? So just to go give you one example, you might have one customer who subscribes to all of our legislative information trying to understand legislative data around the country, around the world. Currently, what they're doing is they're exporting that information into an Excel spreadsheet and then manually creating these reports and whatnot internally. So the ability to add one click report generation, for instance, is a tremendous value add for our existing customers.

Speaker 2

Now whether we package that as a part of our existing solution or upsell that, I think there's sort of more tactical decisions. But obviously, we see it as a transition point from our existing product lines. But Josh, I don't know if there's anything else you want to add on your end.

Speaker 9

Sure, Tim. Yes, Matt, I can just add a little more to it. So holistically, one way to think about it is we've spent a lot of time refining our product portfolio overall, making sure that we're investing in the right products that are going to drive sustained and profitable growth. And as we layer in new product offerings, then it's we've created ourselves more room to be doing that, because of that past refinement of the portfolio. In addition, on the last call, I talked a lot about improvements that we've made over the past year to our commercial organization, how we've been able to drive greater performance and productivity as we've restructured the teams and made other changes.

Speaker 9

So that gives us greater capacity to do more even as we've reduced our operating expenses over time. In addition, we're very focused now on transformation of our overall product portfolio and shifting more to product led growth, as Tim talked about. And that creates the opportunity to be launching newer products, be it co pilots, AI agents or other products into the portfolio and be more efficient in terms of how we drive that go to market going forward.

Speaker 8

Okay, helpful. And then have you explored the opportunity to given the advancements you've made around AI and I think you're definitely on the leading edge here relative to a lot of other companies, but looking to go as more of a partner model, maybe even an embedded type of channel in larger technology stacks where you're powering a lot of the Copilot features, but aren't required to do all of the direct selling. What kind of opportunities do you think might be out there for that? And maybe what's holding you back from pursuing those?

Speaker 2

Yes. So I mentioned in the comments that we've been approached and have approached a number of players in the market essentially doing exactly that strategy. And so maybe I can sort of lay out 2 or 3 different types of partners that we're speaking to at the moment. 1, including existing and kind of new and up and coming large language model companies that have cut data licensing or similar deals in terms of embedding some of the solutions into their existing language models and the like. 2nd, I would say our service companies.

Speaker 2

So these are companies that are going out there that are implementing generative AI within enterprises today that can leverage fiscal note number of solutions that are out there. And then 3rd, I would say our point solution companies or other information services providers that may want to leverage different parts of our technology stack to enhance their existing product offerings. So we mentioned stress lens and earnings call transcript providers or PR agencies that are using our technologies for media training and others. So we're taking a fairly wide view here in terms of looking at embedding our solutions into other technology partners overall.

Speaker 8

Okay, very helpful. And maybe one more, John, if I can. Obviously, the sale of boar.org has given you a little bit more capital and flexibility, but talk of this kind of creating a copilot creator that should accelerate product development. How is that impacting kind of the puts and takes around the M and A strategy as you ahead over the next several years? Is there still a need to sort of buy into various markets?

Speaker 8

Or do you feel like you have the technology now that you can quickly get to market with new demand that's in the market?

Speaker 6

Sure, Matt. I think that as we think about the M and A strategy, it's we've slowed down, but primarily that's had to do with both focusing on continuing to integrate the existing acquisitions or the previous acquisitions we made and continue to drive opportunities there. But the market has a lot of consolidation opportunities for us to continue to integrate additional data sets that will be added to our overall value proposition down the road. So we're just kind of waiting for we're going to be looking at value relative to our own valuation right now liquidity and balancing organic growth versus inorganic growth. But it's not I think we still will continue to do acquisition when the time is right.

Speaker 6

Okay. Thank you.

Operator

Thanks for your questions. Our next question is from the line of Zach Cummins with B. Riley Securities. Your line is live.

Speaker 2

Thanks. Good

Speaker 10

morning and thanks for taking my questions. Tim, I really wanted to ask around what's giving you the confidence that we could see an acceleration in overall bookings in the second half of this year? Obviously, you've made a lot of changes in terms of the operational theme. Just curious of what you're seeing in terms of pipelines and maybe just incremental conversations with larger enterprises on that side?

Speaker 2

Yes. I mean, so I think that we track our pipelines quite closely throughout the years. And so from our perspective, we are seeing the pipeline that we need to sort of see the acceleration that we want, particularly on the enterprise front. But I think in combination with that, a lot of the changes that Josh had talked about, including the sales force realignments that we did last year that are placing a lot more of a heavy focus on large enterprises. That combined with the product enhancements and the bundling that we're talking about today should drive the acceleration that we're looking for.

Speaker 2

But in addition to that, of course, there's a number of different initiatives inside the company that I laid out in the earnings call, that we also sort of see potential upside there as well. So, I I guess, Josh, do you want to kind of jump in here as well with some additional commentary?

Speaker 9

Sure, Tim. Yes, I mean, I'll just echo what Tim just said. We're seeing success where we've put in place these go to market and commercial changes throughout the organization. So as we see them take root, we're seeing the benefits play out in different areas. And so as I mentioned on the last call, where we have seen those, some of those that have been placed for some time.

Speaker 9

We put some more recently in place, in Q4 last year that, we have confidence will bear out in the second half of this year. So when we look very deep in the metrics, we're seeing that progress start to take place. And then we're seeing, just generally speaking, we're seeing good movement in terms of ACVs and the direction we want to see that go as well. And so those to us are really good indicators of where we see the business heading in the second half of this year.

Speaker 10

Understood. And my one follow-up is just really around adoption of your new AI products. Really appreciate the deep dive into all the new solutions that you're rolling out into the market. But outside of some large partner, it seems like there's a great opportunity just to upsell some of these products to your existing enterprise base. So I'm just curious of how you're thinking about monetization, whether it be from within that base or continuing to broaden outside of that?

Speaker 2

Yes. So, I think it just depends on the product line and what problems that we're solving for customers. So, we launched, for instance, our geopolitical co pilot last week. And the expectation is that the rollout of the geopolitical co pilot will be to existing customers first. And we do see that as being a tremendous value driver, not just in terms of driving new sales from a competitive perspective, but also driving better retention rates.

Speaker 2

That being said, I think when you look at other co pilots like Stress Lens or our up and coming kind of product roadmap, which we'll talk about probably at our AI product day in the next couple of weeks, We're taking in certain cases choices to create incremental modules to kind of find those upsell opportunities. So we're sort of taking on a product by product basis and figuring out is it the retention play, is it new sales play, is it an upsell and cross sell play and And then trying to figure out the best pricing go to market model from that.

Speaker 10

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

Operator

Thank you for your questions. Our next question comes from the line of Rudy Kessinger with D. A. Davidson. Your line is live.

Speaker 4

Hey, guys. This is Andres for Rudy. Good quarter overall. I just had a quick question Regarding the total subscription clients that were down 300 ish, do you have any commentary about it? How much of that came from the divestiture and how much was organic?

Speaker 6

Can you say it one

Speaker 3

more time? The line broke up

Speaker 6

a little bit to make sure I understood the question.

Speaker 4

Yes. I'm just asking about the total customer count, the subscription clients at world is down 300 or around 300. Just asking about how much of that came from the divestiture and how much was something else and if you could touch a little bit on that?

Speaker 6

Okay. I think that really relates to the Board dotorg divestiture and the customers that were passed off to the buyer there. And we'll provide more details on that, like I said, in the Q when it gets filed.

Speaker 2

Okay, thanks.

Operator

Thank you for your question. We have another question from the line of Mike Latimore with Northland Capital Markets. Your line is live.

Speaker 7

Hi, this is Vijay Devar for Mike Latimore. So I believe you have briefly commented upon the strategic review in your prepared remarks, but if you could elaborate a little bit more on the types of options that you are considering to realize shareholder value? And at the same time, you have quantified the synergies that a strategy might consider?

Speaker 2

Yes. No, I appreciate the question. At this time, we're not commenting further on the strategic review. I think the only thing that I would say is that we just divested an asset for 7 times ARR LTM ARR And we've said pretty much consistently in every earnings call that we believe that the company is dramatically undervalued relative to peer comps, relative to transaction multiples that are going on currently in the marketplace relative to almost every major measure. And so our Board sees that.

Speaker 2

I think we all see that. And we're prepared to obviously continue to review all options that are available to us to try and drive value for our shareholders.

Speaker 4

Okay, great.

Speaker 7

And maybe I can sneak in a couple of other questions as well. On the sales cycles for logos, do you see them shrinking with co pilots and as well as how do you see sales cycle for the government versus enterprises at the same time new versus upsets? Kind of any characterization of the sales cycle here will be helpful for me.

Speaker 9

So sorry, I just want to make sure this is Josh. I just want to make sure I understood the question. This is a question about what we expect sales cycles to be for CoPilot. Is that right?

Speaker 7

Yes. At the same time between the government and enterprise and new growth of upsells, so any characterization around all these various factors?

Speaker 9

Sure. So generally speaking, in regards to CoPilot, as Tim mentioned, that's more of a product like growth model. So you would see different sales cycles there than you would typically expect in something that might be a sales led growth model and specifically focused on, say, enterprise and government. So you would expect to see, generally speaking, shorter sales cycles. The nature of those would depend on kind of each product, the nature of the audience, and the type of engagement that you seek.

Speaker 9

But typically for those, you'd see a model where someone has the opportunity to essentially try engage with the product in some way before they actually purchase. And so it's a different nature of sales process and generally a more compressed sales cycle that you would expect to see. And I think the second part of the question relating to breakdown of sales cycles between government and enterprise, we typically don't break down the metrics to that degree.

Speaker 7

Okay. Yes, that should be helpful for me. Thank you.

Operator

Thank you for your questions. Ladies and gentlemen, that will conclude our question and answer session here for today. I would like to turn it over back to Mr. Huang for any closing comments.

Speaker 2

Great. Thank you everybody for joining the call. As mentioned, we have an upcoming AI product day and some additional materials online for people to take a look at. So appreciate everybody jumping on. And if there are any additional questions, feel free to reach out.

Speaker 2

Thank you very much.

Operator

Thank you. And ladies and gentlemen, that will conclude today's fiscal note Q1 2024 Financial results conference call. Have a great day. We'll talk to you later.

Powered by Quartr

Key Takeaways

  • FiscalNote delivered Q1 revenues of $32.1M and achieved over $1M in adjusted EBITDA, marking its third consecutive profitable quarter and slightly exceeding prior guidance.
  • The divestiture of its non-core board.org business generated CAD15M in cash, enabled a $65M reduction in debt, and sharpened the company’s focus on its core AI-powered platform.
  • FiscalNote outlined a three-stage AI strategy—data aggregation, proprietary LLM (FiscalNote GPT), and a Copilot & Reasoning platform—unveiling two live AI agents (Stress Lens and Global Intelligence) and planning to launch dozens more domain-specific copilots.
  • Management reaffirmed full-year guidance of $123M–$127M in total revenues, $126M–$134M in run-rate revenue, and $7M–$9M in adjusted EBITDA, and expects bookings to accelerate in H2 thanks to sales force realignments and new AI offerings.
  • FiscalNote emphasized a durable competitive moat with ~90% recurring revenue, 96% net revenue retention, and plans to reach low- to mid-teens revenue growth alongside strong free cash flow margins by 2025.
AI Generated. May Contain Errors.
Earnings Conference Call
FiscalNote Q1 2024
00:00 / 00:00