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Operator: Thank you for standing by. My name is Briana, and I will be your conference operator today. At this time, I would like to welcome everyone to the FiscalNote Q1 2023 Earnings Call. [Operator Instructions]. I will now turn the call over to Sara Buda, Vice President of Investor Relations. You may begin your conference.

Sara Buda: Hi, everyone. Welcome to the FiscalNote Q1 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 are rather subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC’s EDGAR system and on our website as well as the risks and other important factors discussed in today’s earnings release. Additionally, non-GAAP financial measures and other KPIs will be discussed on this conference call.

Please refer to the tables in our earnings release and the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I’d like to turn the call over to FiscalNote’s Chairman, CEO and Co-Founder, Tim Hwang.

Tim Hwang: Thank you, Sara. On today’s call, we will review our first quarter. As always, I’ll discuss our durable compounding revenue, strong gross margin, macro trends driving our business and more. I’ll also talk about our long-term opportunities for asymmetric upside as we innovate around new products and customer segments. I’ll then turn it over to our CFO, Jon Slabaugh, to talk about the details of our financials as we quickly pivot to approximately breakeven adjusted EBITDA in Q3 and positive adjusted EBITDA profitability in Q4 and continue on our pathway as the profitable long-term growth compounder. Before I begin, let me start with a very brief overview of who we are and what we do for those new to the story. At FiscalNote, 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 SaaS platform that aggregates and organizes regulatory, political and macroeconomic information and analyze the impact on their organization.

Changes in policies, regulations and laws impact the decision-making of almost every organization around the world, from changes in regulatory requirements to mandatory reporting requirements that organizations must comply with often on a global basis. Using cutting-edge machine learning and AI capabilities, we aggregate, synthesize and analyze mass amounts of legislative policy, regulatory and macroeconomic data and information around the world and provide actionable intelligence to customers in a subscription model. As such, we’re building an enduring company for the world’s most important and influential decision-makers — these customers range from hundreds of government agencies and public sector customers from the Department of Defense, the White House, every member of the House and Senate in the U.S. Congress, the Federal Reserve and public sector organizations in Europe and Asia to major corporate customers, including half of Fortune 100 that need to stay on top of an ever-shifting regulatory, political and geopolitical landscape in countries around the world.

These customers rely on FiscalNote every day to help interpret the impact of policies, legislation and macroeconomic shifts on their institutions. As a result, thousands of global customers in the commercial and public sectors depend on FiscalNote’s SaaS platforms and analysis to discover process and navigate the impact of government policy making on their organizations and more importantly, take actions which achieve 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 level. The same way that other information companies, such as S&P Global, IHS Markit, FactSet, MorningStar, CoStar and Avalara have innovated in their respective information field, FiscalNote continues to deliver mission-critical information that has a direct impact on our customers’ operations.

We’ve invested tens of millions of dollars and almost 10 years building a dispensable 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 as well as the software tools to help our customers respond. With that, let me start with a summary of our financial results that serves as a platform for our compounding profitable growth in 2023 and beyond. We clocked yet another quarter of compounding highly predictable revenue growth. Q1 revenue was $31.5 million, marking growth of 21% year-over-year and in line with the guidance we provided on our last call. As we’ve demonstrated, we have a highly predictable recurring revenue stream from a diverse customer base of thousands of organizations that renew their contracts year after year, and we continue to secure new customers as well from state governments to Fortune 100 enterprises.

These customers rely on FiscalNote every day to help interpret the impact of policies, legislation and macroeconomic shifts on their institutions and more importantly, to take actions which achieve their business objectives. We also continue to deliver consistently high gross profit margin. Q1 adjusted gross margins were 80% in the quarter. These margins are a hallmark at FiscalNote and stem from our SaaS business model, AI pedigree and data-rich products, all of which form the basis for strong cash flow in the future. On the bottom line, our adjusted EBITDA loss was in line with expectations of approximately $7 million. And as a real detail, through a combination of ongoing ARR growth and a diligent focus on cost, we are reiterating our plan to reduce our adjusted EBITDA loss, notably starting in Q2 and to be approximately breakeven in Q3 and profitable in Q4 on an adjusted EBITDA basis.

Jon will walk you through the details. Our cash position at the end of the quarter was $47.5 million, and we have an additional $94 million of debt capacity subject to conditions. We continue to have sufficient capital to fund our growth. And as we’ve stated, we are capitalized fully and do not require any additional capital raises to achieve our plan of adjusted EBITDA profitability and over time, free cash flow. Turning to managing KPIs. We delivered run rate revenue of $134 million, including our late January acquisition of Dragonfly. Excluding at Dragonfly’s, organic run rate revenue was $126 million. Our annual recurring revenue was $119 million, marking pro forma growth of 10% year-over-year and 9% on an organic basis, excluding Dragonfly.

This is in line with our expectations, and we expect ARR to continue to ramp through the year as it usually does. Also, internally, we are seeing benefits from the operational and organizational changes we have been implementing, and we expect to see benefits of those improvements reflected in our accelerating second half growth. For the quarter, net revenue retention was 96%, and adjusted NRR was approximately 98% in the first quarter, adjusting for the impact of the anticipated expiration of the legacy noncore content licensing relationship that was inherited as part of a prior acquisition. On a trailing 12-month basis, our net revenue retention was 97%. Overall, net revenue retention remained strong; a strong reflection of our successful cross-sell and upsell model, and the must have mission-critical solutions we deliver for our customers.

We reiterated our guidance for 2023 with GAAP revenue of $136 million to $141 million, marking growth of 20% to 24% year-over-year. We also expect run rate revenue of $148 million to $155 million for the year. And as you mentioned, our path to profitability remains on track. Our guidance and continued performance are driven by our predictable compounding revenue growth, strong recurring revenue, high revenue retention and high gross margin profile. As a result of these fundamentals, we continue to reiterate our guidance for positive adjusted EBITDA profitability in Q4, and it will translate into free cash flow in the future. Now let me touch on some of the macro trends that serve as a backstop for our growth. Our market is driven by political events and a regulatory environment that continues to increase in complexity at an unprecedented pace.

In the U.S. alone, in the 2022 legislative session, the combined State House has introduced more than 84,000 bills and acted 24,000 of them. Each of these legislative bodies are supplemented by tens of thousands of regulatory bodies across the country that consistently pass a myriad of rules and regulations that impact every single industry from health care access to funding to consumer data privacy to labor and employment regulation. The legislation and regulation vary greatly from state to state and city to city, creating a myriad of compliance and operational issues for organizations who market, sell and operate their businesses across the U.S. as well as government agencies who legislate, track and act on those regulations. On a global level, regulation and policymaking is also at an all-time high.

New EU legislative acts have increased 13% since 2020 alone. Moreover, new regulations from the EU to China often quickly extend from local to global, creating large regulatory complexity that spreads globally, particularly around issues such as semiconductors that transition to the new energy economy, crypto assets, the Data Act and climate change legislation with significant variation in how and when each region adopts and implement these regulations. Regulatory risk is closely tied to geopolitical, macroeconomic and operational risk as issues such as military conflicts and civil unrest spur politicians around the world to respond with new regulations, which in turn creates uncertainty for all organizations and significant top line and bottom line impact for companies that operate globally.

This is having a direct and significant impact on our customers. In a recent PwC survey of CEOs, more than half of global CEOs reported that changes in regulation will have the biggest impact on profitability in the industry in the next 10 years. Last year alone, corporations faced $6.4 billion in penalties from SEC enforcement actions, suffered $59 billion in losses from sanctions against Russia and supply chain disruptions may have caused over $4 trillion in lost revenues in a single year. This backstop is the underpinning of our business. Without FiscalNote, organizations face a manual, complex, expensive and inefficient process for tracking, assessing and taking action on regulations and geopolitical issues. From the day we found the FiscalNote, we saw a tremendous underserved opportunity to use AI to structure, normalize, analyze and digitize [indiscernible] the regulatory, legal, macroeconomic and geopolitical information and to embed software workflows that make data useful and actionable for our customers.

We believe that this remains a large global market opportunity. We now have the breadth of data and the depth of AI that is unparalleled in our market. As a result, FiscalNote is now positioned better than ever and better than anyone to build a category creator, which constantly innovates to turn insights into actions, convert challenges into opportunities to mitigate risk to protect . As one of our larger multinational enterprise customers stated, FiscalNote empowers us to be at the forefront of the issues that matter most for our business. Another client referred to the current regulatory environment as chaotic and pointing to FiscalNote as a critical source of truth at a time of constant misinformation. With that context, let me talk briefly about the underpinnings of our growth model and the opportunities for potential asymmetric upside in the long term.

Every day, our team focus on allocating capital to the areas of our business with the greatest return and the highest upside. As leaders, we think in terms of both evolutionary growth and revolutionary growth. So let me start with evolutionary growth. Quarter after quarter, we continue to deliver strong organic growth supplemented by accretive tuck-in acquisition that facilitate cross-sell and upsell opportunities among our customers across vectors. The 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. The durability of our recurring revenue model reflects the strength of our products and the deep customer relationships that we’ve built.

This drives a high level of revenue predictability for our business, as you’ve seen. Further, because of our 80% adjusted gross margin profile and our ongoing focus on OpEx cost management, the model also drives significant operating leverage, leading to adjusted EBITDA profitability in Q4 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%. So the evolutionary clockwise foundational organic revenue growth and margin profile of our business is very strong. Every single quarter, we will continue to expand our business incrementally by continuing to renew our base of customers at a high rate, adding to our annuity-like recurring revenue base and maintaining a disciplined strategy to maintain high gross margins and positive adjusted EBITDA.

In terms of additional growth opportunities, as I mentioned in previous calls, the European market stands as one of the most heavily regulated markets on the planet. And yet only 13% 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. Another market segment that we believe to display strong incremental growth is the state and local government market. According to the U.S. Census Bureau, there are approximately 90,000 local governments in the U.S. alone. Each of these jurisdictions make decisions about everything from property taxes, education funding, zoning, et cetera.

I need to understand the relationship to state and federal policymakers as well as maintain their own relationships with their constituencies. This quarter, as an example, we announced a major deal with the Georgia legislature in the State Senate, the Office of Lieutenant Governor and members of Dekalb County Board of Commissioners to do just that. We believe there are opportunities like this in every state in the country. Now let me touch on revolutionary growth opportunities to accelerate our business and drive outperformance near term and long term. These are incubated opportunities that we have been cultivating as a management team that could at any moment, take us beyond our clock like fundamental compounding growth and deliver asymmetric upside.

One area of focus for us is leveraging partnerships for larger and broader customer development and more efficient product development. As you’ve seen, we are starting to gain recognition as the preeminent leader in AI and data for managing regulatory, geopolitical and operational risk. Earlier this year, we announced a partnership with Peraton, a large integrator for national security solutions. By embedding and integrating our AI and data solutions with Peraton’s national security technologies, we bring mutual value to customers in the intelligence, defense, security, health and state government sectors who need large-scale trusted solutions that keep people safe and secure. Federal agencies and large government organizations have been FiscalNote customers for a very long time.

Through our own strategic growth initiatives under partnerships such as Peraton and other defense contractors, we see long-term opportunities to secure large-scale multiyear government contracts that can be transformative to our group. Our leadership in AI and data is leading to other partnerships and integrations as well. In March, OpenAI selected FiscalNote as one of the 14 inaugural trusted partners and a full provider of legal, political and regulatory data information to collaborate with AI research and to provide select content for users of OpenAI’s ChatGPT platform. Just 2 weeks ago, AI and data analytics leader Databricks also selected fiscal to provide regulatory and geopolitical data and information for their new data at marketplace, which is accessed by more than 9,000 customers.

And other AI industry leaders are reaching out to us about additional collaborations as well. These new partnerships are a testament to the importance of our sector and demonstrate FiscalNote’s clear leadership in our market. Other catalyst for our upside is pure new product development, which is, of course, also driven by our decade-long investment in AI. We see compelling and timely opportunities to organically extend our innovation to new areas of risk that have direct an overarching impact on our customers. We will continue to launch new products that leverage our core competitive advantage here. advancements in AI, such as ChatGPT and GPT4, when combined with the unique and defensible combination of data, AI and human intelligence that we hold, should result in a faster time to market and more efficient product innovation that enables us to create new products in record time at an incredibly low cost.

As an example, many of the world’s largest enterprises are increasingly concerned about risks in their businesses and supply chains, risks that are operational in nature and impacted by the types of legal, political, regulatory and security issues that we track today. We are uniquely positioned to bring new innovative solutions to market that directly address their biggest and most pressing concerns because of our long-standing leadership in AI as well as our deep and regulatory data sets that empower businesses to predict, understand, quantify other types of risks that have tremendous impact on their operations. This is just one of many internally driven product development opportunities that allow us to broaden and deepen our customer relationships, push FiscalNote into new areas of growth for our customers and provide new lines of revenue that provides significant expansion opportunities for future growth.

Stay tuned for more information in this area soon. And finally, M&A remains a catalyst for incremental growth as well. We continue to pursue selective M&A targets that facilitate strong cross-sell among our base of customers. We’ve had great success with the majority of our acquisitions as we scale their solutions, catalyze their growth and add incremental value for our customers. Our January acquisition of Dragonfly is already generating opportunities as our customers look at security and operational risk in the markets they operate in. In this environment, we continue to be selective in our acquisition target and structure, but we remain opportunistic when we see clear opportunities for outsized growth. In sum, as leaders, we are constantly innovating around new customer segments, new product lines and new offerings, so we can expand the value we deliver for thousands of customers every day.

We continue to grow, continue to maintain strong relationships with our customers through our retention and subscription model, continue to support a high gross margin and long-term free cash flow generation. And we continue to innovate for the future by expanding our product suite and geographic footprint with a capital model that supports us profitably and beyond. With these strong fundamentals, we remain focused on strategies that allow us to deliver our evolutionary growth and profitability goals while positioning us for revolutionary asymmetric upside in the future. We will continue to allocate our time and capital on the activities and innovations that generate the strongest returns and maintain our steadfast commitment to delivering superior customer value.

In summary, we are executing on the opportunities in front of us today, improving our compounded growth model. Our business is driven by macro trends that continue to create a large amount of uncertainty from a policy perspective. Our foundation of recurring revenue, high adjusted gross profit margins and strong operational leverage will drive our business to adjusted EBITDA profitability in Q4 and strong free cash flow soon thereafter. Strategically, we have a unique indispensable combination of data, AI and human intelligence that provides unparalleled value for our customers and a sustainable competitive advantage for FiscalNote. While the strength of our fundamentals are not yet reflected in our stock price today, we are confident that long term, our valuation will align with the fundamentals of our business.

As leaders, we are 100% focused on building a durable, profitable, compounding growth company that provides unique value to the world’s most important decision makers and scaling this business to $200 million, $300, $500 and $1 billion in recurring revenue and beyond. Now let me turn it over to Jon for details on our financials and our outlook going forward.

Jon Slabaugh: Thank you, Tim, and good morning. I’m going to spend some time providing further details on the quarter. I’ll also discuss what to expect in terms of financial performance for this year and walk through our path to positive adjusted EBITDA and over time, positive free cash flow. Let me first start with revenue. First quarter revenue was $31.5 million, marking growth of 21% year-over-year in total and 10% growth on an organic basis. We are executing on our strategy to deliver compounding growth, driven by strong organic growth and complemented by accretive, strategic tuck-in acquisitions. This has been our track record, and we expect to continue this revenue performance moving forward. First quarter subscription revenue, which makes up 90% of our total revenue, was $28.5 million.

This is an increase of 25% from a year ago and 14% on an organic basis, once again showing our strong recurring revenue model. Our advisory and other revenue was $3.1 million, a slight $200,000 decline year-over-year. We exited Q1 with run rate revenue of $134 million in total, marking 10% growth year-over-year. Run rate revenue is defined as ARR plus non-subscription revenue earned during the last 12 months. It is a key management metric and serves as a baseline for the subsequent quarters and beyond. On an organic basis, run rate revenue was $126 million, reflecting 9% growth on a pro forma basis as defined in our press release. NRR, or net revenue retention for the quarter was approximately 96%. On a trailing 12-month basis, NRR was 97%.

NRR rates can fluctuate slightly from quarter-to-quarter. This quarter, our NRR was affected by the anticipated conclusion of a large licensing contract with FiscalNote inherited through an acquired business. Excluding this contract roll-off, NRR would have been 98% for the quarter. We do find that NRR rates are highest among our large enterprise and public sector accounts and lower among midsized companies and trade associations. Enterprise and strategic accounts now represent our largest, fastest-growing, highest retention customer group and will continue to drive increasing total NRR. We are continuing to scale our strategic and enterprise accounts teams and reallocating our sales resources accordingly and grew our total annual recurring revenue or ARR to $119 million as of March 31, an increase of 19% compared to the same period in 2022.

Organic revenue, as we defined, was $113 million as of quarter end. This represents a 9% growth rate when compared to our ARR in Q1 of last year on a pro forma basis. This is consistent with our expectations for the year as we anticipate most ARR growth will take place in the second half of the year, consistent with prior years. Looking at gross profit, we continue to enjoy strong margins. Our Q1 gross profit was $22.6 million, representing a 72% margin. Our first quarter non-GAAP gross profit was $25.2 million, representing an 80% gross margin after adjusting for amortization. Sales and marketing costs were $12.3 million for the quarter, an increase of $2.8 million year-over-year. R&D expenses were $5.1 million, a reduction of about $1 million from a year ago, due in part to increased efficiencies and the completion of certain rebuild projects.

Editorial content costs were approximately $4.3 million, a modest increase year-over-year. G&A expense for the quarter was $18 million. This includes approximately $5.6 million related to the accounting treatment of noncash stock-based compensation expenses. Excluding these noncash charges, G&A was approximately $12.7 million, an increase of about $2 million year-over-year, largely due to public company costs. The operating loss for Q1 was $27 million in total. This includes $6.5 million of stock-based compensation, a $5.8 million goodwill impairment charge related to the performance of our Equilibrium software product versus its forecast and $1.4 million of transaction costs, largely related to the accounting treatment of the acquisition of Dragonfly.

Our total interest expense was $6.7 million. Of this, cash interest expense was $4.7 million, which is a good proxy for our quarterly cash interest expense going forward, depending on interest rates. The GAAP net loss for Q1 was $19 million, which is reconciled to our adjusted EBITDA loss of $7 million in our press release. Our balance sheet remains solid at $47.5 million of cash and cash equivalents as of March 31. We have sufficient capital to support our growth initiatives and fund our path to positive adjusted EBITDA in Q4 of this year. As we stated in our last call, we are taking steps to reduce our operating expenses, which should result in $6 million to $7 million of in-year cost savings. These cost reduction steps include actions we’ve already taken and will continue to take this year, including adjusting our allocation model, aligning our sales teams to focus on the highest potential clients and segments, using technology to improve our internal processes and workflows, consolidated product development groups and R&D teams and vendor consolidation and elimination.

These actions will start to benefit our adjusted EBITDA in Q2 and will continue in the second half of the year. Lower costs, combined with higher second half revenue will drive us to be approximately breakeven on an adjusted EBITDA basis in Q3 and generate positive adjusted EBITDA in Q4. This brings me to our guidance. For Q2, we expect revenue of $32 million to $34 million. Our adjusted EBITDA is expected to be a loss of $4.5 million to $3.5 million depending on revenue and the timing to realize the benefit of certain cost reductions. For the full year, we are reiterating all of our guidance previously provided, including a run rate revenue of $148 million to $155 million, inclusive of the recent Dragonfly acquisition and excluding any future acquisitions we may make.

GAAP revenue of $136 million to $141 million, marking growth of 20% to 24% year-over-year, including the acquisition of Dragonfly. We expect adjusted gross margins to continue at approximately 80%, and we are reiterating our guidance for adjusted EBITDA loss between $8 million and $6 million for the full year. We are also providing new visibility to our plan to be adjusted EBITDA breakeven in Q3. Given our guidance for the year, this clearly means solid adjusted EBITDA profitability in Q4 of approximately $3 million to $5 million, resulting from the cost action we discussed previously and our seasonally stronger second half revenue. As we continue to deliver strong 80% adjusted gross 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.

As we reached the inflection point of adjusted EBITDA profitability in the short term, we expect this operating leverage will enable us to deliver strong free cash flow margins in the long term. We have approximately $94 million of debt capacity subject to certain conditions. Our lenders remain flexible and are supportive of the company’s focused strategic acquisition program. As Tim discussed, we will continue to pursue selective M&A opportunities that are accretive to our profitability and that drive cross-sell opportunities within our stable and growing base of thousands of customers. And of course, given our stock price, we are focused on transaction structures heavily weighted towards earnout and structured stock consideration with terms that give long-term upside with minimal dilution.

In closing, we are delivering on top line growth. As we execute on our strategy to build a compounding growth, profitable business that drives mission-critical solutions to the world’s most important decision makers, there are secular trends propelling our business and creating sustainable demand from increasing regulation to geopolitical threats to macroeconomic uncertainty. Only FiscalNote has the breadth of AI-enhanced data and human intelligence to help customers navigate this increasing operational complexity. We continue to leverage our investments in AI to drive new growth opportunities and drive efficiencies throughout the organization with highly predictable recurring revenue, strong gross margins and ongoing cost management. Our path to profitability is clear, and we have the operational structure and capital we need to scale this business and drive long-term value.

With that, we will now open up the call to questions. Operator?

Operator: [Operator Instructions]. Your first question comes from Mike Latimore with Northland Capital Markets.

Operator: Your next question comes from Matt VanVliet with BTIG.

Operator: Your next question comes from Rudy Kessinger with D.A. Davidson.

Operator: There are no further questions at this time. I will now turn the call back over to Tim.

Tim Hwang: Great. Thank you, everybody. I appreciate everybody jumping on the call here. We’ve got another great quarter and really looking forward to at least delivering on the results that we’ve guided towards here and really continue to execute on the business. So I appreciate the time. Thank you, everybody.

Operator: This concludes today’s conference call. You may now disconnect.