NOTE - NYSE

Good afternoon, ladies and gentlemen, and welcome to the FiscalNote Second Quarter 2024 Financial Results Conference Call. At this time, I would like to inform all participants that their lines will be in listen-only mode. After the speakers' remarks, there will be a question-and-answer session of the call. [Operator Instructions] I would now like to introduce your host for today's conference, Bob Burrows. Mr. Burrows. You may begin.

Good evening. My name is Bob Burrows. I'm with Western Avenue Advisers LLC, which was hired in April as an Investor Relations consultant to the company following Sara Buda's departure. I continue to act in that capacity and look forward to speaking to the company's investor stakeholders in the coming weeks and months ahead. Thank you for joining the call today as we discuss FiscalNote's second quarter 2024 financial results. With me on today's call with prepared comments are Tim Hwang, Chairman, CEO and Co-Founder; and Jon Slabaugh, CFO and Chief Investment Officer. Other members of the senior management team will be available during the Q&A session that will follow these prepared comments. Please note, copies of today's press release, the current report on Form 10-Q for the quarter as well as an updated version of the corporate overview presentation are all 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. These statements are not guarantees of future performance but rather, are subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of the material risks and 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 updated version of the corporate overview presentation, 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 measure. Finally, we use key performance indicators or KPIs in evaluating the performance of our business. 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 updated corporate deck for definitions of these important metrics. And with that, I'd like to turn the call over to FiscalNote's Chairman, CEO and Co-Founder, Tim Hwang. Tim?

Thank you, Bob, for that introduction, and thank you all for joining us this afternoon. It's good to be with you today to discuss our second quarter 2024 results and provide an update on the state of our overall business. I always look forward to these opportunities to connect with our shareholders and share with you the exciting developments here at FiscalNote. First, let me take a few moments to remind you of some of the core fundamentals of FiscalNote. As you've heard from me many times before, 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 the organization overall. We are the market-leading AI platform for the regulatory legislative policy and geopolitical intelligence sectors, essentially the Bloomberg Terminal for regulatory and 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 thousands of policymakers, millions of legislative regulatory bodies and purpose-built analytical tools monitoring governments around the world that have enabled FiscalNote to build a market-leading position across thousands of customers. Many of our assets, including CQ, serve essentially at 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. We operate in a large and growing $40 billion addressable market driven by increasing global uncertainty as well as operational and regulatory complexity that impacts almost every organization, from governments and nonprofit 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 the 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 500 rely on FiscalNote every day to help interpret the impact of policies, legislation, elections, global conflicts, macroeconomic shifts on their institutions and more importantly, to take actions to achieve their business objectives and minimize political, operational and economic risk. This forms the basis of our durable and long-term growth. We enjoy recurring compounding revenue streams of customers in the basis of annual subscription renewals, coupled with ongoing opportunities to upsell and cross-sell the same customers by offering incremental data sets, products and capabilities that enhance and expand their overall experience and, therefore, 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. Driving our success as a management team with a strong record of innovation and product success, which, in turn, has enabled us to push the balance of the market and be innovative on behalf of our customers. We have relentlessly focus 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&P Global, IHS Markit, FactSet, Morningstar, CoStar and Avalara have innovated in their respective information fields, FiscalNote is forging a new path for global political, legislative and regulatory policy and market intelligence by delivering mission-critical information that has 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 services industry. We have a clear competitive advantage to deliver on this outcome. With that as a backdrop, let me turn to our current state of the company. We continue to see positive signs through the business despite macroeconomic headwinds. We have an increased focus towards higher returning segments of our business, where we have reallocated resources towards improving retention rates, margins and profitability. Although we have revised full year revenues, our adjusted EBITDA is still tracking to meet expectations for the year, which highlights our improved profitability and margin profile. This is a testament to our operational discipline, our streamlined product portfolio and our focus on ensuring that we continue to maintain and increase profitability regardless of circumstance. Ultimately, as we progress through 2025, we expect revenue growth to accelerate and more revenue to drop right to the bottom line as we improve operating leverage further. In regards to revenue, we also still see modest growth in our European market and incremental growth from our Dragonfly acquisition, focused on operational risk and security. We continue to build the foundation for higher growth in the future. We had many exciting product launches in the second quarter, including StressLens, which equips users with pioneering innovative new AI agent to help decode the human element of mission-critical calls, speeches, testimony and remarks given by policymakers, CEOs, regulators and other key decision makers. Copilot for Global Intelligence, which transforms policy, regulatory and legislative workflows, and Copilot for Policy, our second Copilot designed to enable increased efficiency and impact on policy and legislative workflows for government affairs professionals. We highlighted these new products at our AI Day in June, which was received positively by analysts and customers and drove a significant volume of new sign-ups for Copilot for Policy in particular. As we've noted on prior calls, this year, we are increasing the velocity of our product launches and enhancements as the foundation for an enduring and sustainable growth. We have made strong progress to date with the launches that I've already noted and we'll have more to announce later this year regarding our core offerings. We know that this is important to increasing client engagement retention overall. The enhancements we are bringing to market, which will take advantage of our industry lead in AI and data science will have a positive impact on retention and growth in the future as well. As I mentioned earlier, the changes to our forecast for calendar 2024 reflect the ongoing focus on higher returning business segments, where we have reallocated resources towards improving client retention rates, margins and profitability. We are focused on increasing efficiencies and productivity in our business in light of the challenging macroeconomic environment. In addition, we are focused on accelerating growth in future quarters through the product development efforts that I've discussed, which will further differentiate our product set and drive increased customer engagement. We are already seeing early indicators of this potential in our Copilot for Global Intelligence, which is driving new cross-sell leads. We have additional product development and enhancements on our road map for later this year, which will impact other areas of our portfolio. We expect these efforts to provide a tailwind to our revenue growth in 2025. To wrap up, we conclude by saying we remain excited about the current state of our business and look to continue to execute across second half 2024 and bridging into 2025. Our investments in AI, our focus on operational excellence and our commitment to customer success position us to capitalize on the vast opportunities ahead. I believe that the new AI-driven feature will mean that the old ways of analyzing legislative, regulatory and geopolitical risk will become obsolete and will drive enormous opportunities for FiscalNote. As I said on our first quarter call in May, and I'll say it again, as we move through 2024, we view it as the first step in a multiyear journey to earning our place in history books and become 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 power formula and one that I believe will create significant value for all of our stakeholders in the years ahead. With that, I'll turn it over to Jon Slabaugh, our CFO, for a detailed review of our numbers. Jon?

Thank you, Tim. My comments this afternoon will be brief, so let me jump right in and walk through the numbers for Q2 2024, starting with the income statement. Total revenue for Q2 2024 was $29.2 million, lower than the prior year period due primarily to the divestiture of Board.org. While down period-to-period, subscription revenue remains the cornerstone of our business, accounting for 93% of total revenue this quarter, in line with the company's historical trends. Digging deeper into revenue, let's look at our key performance metrics. As of Q2 2024, run rate revenue was $121 million and annual recurring revenue was $109 million. On a pro forma basis, adjusting for the impact of the Board.org divestiture, current year run rate revenue was level with the prior year second quarter and ARR was slightly higher than the prior year quarter. And as of Q2 2024, net revenue retention was 98%, level to the prior year. Overall, on a true apples-to-apples basis, revenue performance for the current period was on par with last year, in line with our revised forecast and indicative of our existing operational capacity. Turning to expenses. Principal operating expenses in Q2 2024 continued the trend of year-over-year decreases, reflecting the impact of cost-savings initiatives instituted in 2023 as well as the impact of the sale of Board.org and sunset products. Specifically, the cost of revenues decreased by over $2.5 million or 28%. R&D decreased by $1.3 million or 29%. Sales and marketing decreased by approximately $2.6 million or 23% and G&A decreased by nearly $5 million or 30%. In aggregate, total operating expenses in Q2 2024 fell over $11 million versus the prior year or 25%. On a pro forma basis, excluding amortization expense, stock-based compensation and the impact of the sale of Board.org, OpEx decreased approximately $6 million or 16%. Looking at our profitability during the quarter, let's start above the line. Gross margins remained strong in the quarter with Q2 2024 coming in at 77% on a GAAP basis and 85% on an adjusted basis, both increases over the prior year period. These improvements primarily reflect our focus on consistent adjusted EBITDA growth and the impact of the sale of Board.org, sunset products and improved efficiencies. As we've said in past calls, we continue to pursue further incremental operating efficiencies. Transitioning to below the line. GAAP net loss for Q2 2024 was approximately $13 million, an improvement over the prior year period. EBITDA for Q2 2024 was negative $2 million, also an improvement versus the prior year. And adjusted EBITDA was a positive $2 million versus a negative $4 million for the prior year. With a positive adjusted EBITDA for the quarter, that brings FiscalNote to 4 consecutive quarters of positive performance for this key profitability metric, a total of approximately $7 million on a trailing four-quarter basis. Turning to the balance sheet. At quarter end, we had cash and cash equivalents of $38 million, which was bolstered by the sale of Board.org in March. Period-end cash also reflects the ongoing initiatives to improve efficiencies across the company and our continuing attention to prudently allocate capital to investments in the business with the highest potential for growth and positive return. Additionally, at quarter end, our total debt outstanding, including principal and accrued interest, stood at $172 million, sequentially lower than the end of the first quarter. Turning to guidance. Today, we raised and tightened our full year profitability forecast for adjusted EBITDA to approximately $8 million, reflecting continued operational efficiencies. At the same time, we lowered our full year revenue forecast for total revenues to approximately $121 million, reflecting the impact of the recently experienced higher rates of customer churn, driven by a number of factors, including macroeconomic headwinds and delays in the launch of certain product enhancements. The weaker client retention experienced in recent quarters has led to slower ARR growth. However, as we progress through the second half of 2024 and into 2025, our continued investments in product innovation and enhancements focused on improved customer experience, including those featured in our June AI Product Day, should drive higher customer engagement, retention rates and as a result, revenue growth and improved operating leverage. We also today provided our initial guidance for Q3 2024 total revenues of approximately $29 million and adjusted EBITDA of approximately $2 million, both reflecting trends we've experienced thus far this year. Finally, I wanted to note that the Board continues to review all strategic alternatives available to the company to maximize value for shareholders. As we stated before, we do not intend to provide updates on the outcome of this review until further disclosure is appropriate and required. Our business through the midpoint of the year remains well positioned to drive further impact and success. We continue to implement our product strategy while executing on the operational efficiency initiatives as we further solidify our position as a critical partner to a diverse global customer base. That concludes my prepared remarks. I'll turn it over to the operator to begin the question-and-answer session. Operator?

Thank you. [Operator Instructions] And your first question comes from the line of

Hi, this is Ethan Widell calling in for

Yes, this is Josh. I can address that. So in terms of what we're seeing there, there's certainly the macro in play. We're seeing some slower decision-making, some softness on renewals as a result of the macro. We are very focused on driving improvements through what we can do in terms of the product improvements that Tim spoke about, and we are very confident in our ability to have a positive impact on customer engagement and retention, but macro is definitely playing a factor. And we're doing other things, too, around operational as well as we have continued to do over time, look at things like customer scoring models and the like that we think will drive improvement there as well.

Got it. Appreciate that.

Your next question comes from the line of Mike Latimore with Northland Capital Markets. Please go ahead.

Hi, this is Vijay Devar [ph] for Mike Latimore. Thanks for taking my questions. The first one is on the Board.org. You've got 7x revenue for that in terms of valuation. So wondering are there any other groups that could logically be independent. And if divestment strategies looked at for such groups, what valuations would be logical for those?

I'll take that. It's Jon Slabaugh. And I would say that we're not presently planning to make a divestiture that we were prepared to speak to at this time. And I think it's – I think we have a view of valuation in the underlying products that we own, and we think they're disconnected from where overall market value is, and we'll continue to explore ways to maximize shareholder value. But presently, nothing imminent.

All right. Got it. And secondly, on the majority of bookings tend to happen around the September-December time frame. So how are the leading indicators of bookings for that period? We talked about a little bit macro headwinds, but any commentary on the leading indicators for bookings? That will be helpful.

Sure. Yes, this is Josh. So I mean our forecast reflects what we expect to see from a bookings perspective for the second half. As I mentioned, we have seen some slowness from the macro, but we're taking steps that we need to do to address what we can control internally. We do have a healthy new logo pipeline. So we're feeling better about the second half.

Yes, thank you.

[Operator Instructions] There are no further questions. I will now turn the call back over to Bob Burrows for any closing remarks. Please go ahead.

Thank you, Angela. That concludes our call today. We appreciate everyone's participation on the call. And if there are any additional questions, obviously, feel free to reach out to any of us. Again, we really appreciate the time and thank you very much. We'll speak to you all soon.