FiscalNote Holdings, Inc. Q4 FY2022 Earnings Call

Good morning, and welcome to FiscalNote’s Q4 2022 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the call over to Sara Buda, Vice President of Investor Relations. Thank you. Please go ahead.

Hi everybody, welcome to the FiscalNote Q4 2022 earnings call. During this call, we may make statements related to our business that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance but are rather subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of 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 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.

Thank you for joining us this morning. On today's call, I will review our fourth quarter and full year results for 2022 and provide insights into the fundamentals of our business as we aim to establish a sustainable growth company with ongoing subscription revenue growth, strong gross margins, and an impressive free cash flow model over time. After my remarks, I will hand it over to our CFO, Jon Slabaugh, who will delve into our financial details and outlook for the year as we rapidly move toward profitability. Before we start, since many of you are new to FiscalNote, I'd like to give an overview of who we are and what we do. At FiscalNote, our mission is to help our customers navigate a complex and ever-changing world. We do this by providing a proprietary SaaS platform that leverages artificial intelligence to gather, analyze, and synthesize vast amounts of regulatory, legal, and policy information. We combine this data with human insights and workflows to make it actionable for our customers. Changes in policies, regulations, and laws affect the decision-making of nearly every organization globally, from regulatory changes to mandatory reporting requirements. Thus, we're building a lasting company for the world's key decision-makers. Our customer base includes hundreds of government agencies and public sector clients, such as the Department of Defense and the White House, as well as major corporations, including half of the Fortune 100, who need to stay informed in a constantly shifting regulatory and political landscape. These clients increasingly rely on us to interpret how policies and legislation impact their institutions, enabling them to achieve their business goals while minimizing political and economic risks; this is the foundation of our long-term growth. Since founding the company, we have created a category leader that continually innovates to turn insights into action, convert challenges into opportunities, and manage risks to safeguard operations. Essentially, we've become a crucial and omnipresent source of political, legislative, and regulatory information at local, state, federal, and global levels. We've invested tens of millions of dollars over nearly a decade to build a strong combination of data, information, and AI technology to collect, synthesize, and derive meaning from the rapidly expanding unstructured regulatory and legal information worldwide, along with software tools to assist our customers in their responses. Just as other information companies have evolved in their sectors, FiscalNote continues to provide vital information that directly impacts our clients' operations. Now, I will summarize our financial position that provides a base for our continuing profitable growth in 2023 and beyond. Our revenue has consistently grown thanks to a large customer base that renews contracts and subscriptions annually. In 2022, we achieved a 37% increase in GAAP revenue, reaching about $114 million, highlighting our capacity for sustained growth even amid challenging macro conditions. Our management KPIs show that our run rate revenue has increased to $127 million, of which $125 million was organic. Our annual recurring revenue, which makes up 90% of total revenue, stands at $113 million, showing a 14% year-over-year growth and 13% organically. We also increased our net revenue retention to over 100% on a trailing 12-month basis, reflecting our successful cross-sell and upsell strategies as well as the essential solutions we provide. Additionally, our guidance for 2023 indicates another year of strong growth and momentum, with expected GAAP revenue between $136 million and $141 million, representing a 20% to 24% year-over-year increase. We anticipate run rate revenue of $148 million to $155 million, supported by recurring revenue from thousands of blue-chip customers and high retention rates. Our durable business model creates high predictability; we renew and upsell our customers each year while also adding new clients. These customers maintain high retention rates due to the quality of our products and the robust relationships we have established. FiscalNote has consistently stood out not only with its recurring revenue model but also with high adjusted gross margins, around 80%. These margins stem from our SaaS approach, AI expertise, and data-rich products, positioning us for future strong free cash flow. We are on track to achieve adjusted EBITDA positivity in the fourth quarter of this year. Furthermore, our growth, high net retention, stable margins, and increasing operational efficiency suggest we are headed toward impressive free cash flow margins beyond this immediate milestone of adjusted EBITDA profitability. We are well capitalized following our public listing and the funds we secured last summer, fully equipped without needing further capital raises to fulfill our plans for adjusted EBITDA profitability and free cash flow margins. Lastly, alongside our organic revenue model, we continue pursuing valuable M&A opportunities that enhance our capabilities in new markets and technologies, which fuel growth. Our acquisition pipeline remains active, and we take a thoughtful and diligent approach to ensure they align with our business fundamentals. We are strategic capital allocators, prioritizing investments that yield high returns for our shareholders while delivering results for our customers. Jon will elaborate on our financial results and provide a detailed outlook for 2023. Now, let's discuss the strong fundamentals supporting our growth in 2023 and positioning FiscalNote for sustainable returns over time by focusing our attention and capital on promoting long-term profitable growth. First, our strategy is based on a large total addressable market with ongoing trends related to the increasingly complex regulatory, geopolitical, and economic landscape. Experts have estimated our total addressable market at $37 billion, which reflects what companies and organizations spend yearly on legal, regulatory, and policy information products. Our market is influenced by political events and the regulatory landscape, which shows no signs of slowing down. The world continues to grow more complex and unpredictable for our customers, with military conflicts globally, market supply disruptions, and the transition to new energy economies prompting regulators to respond with new regulations, creating uncertainty for organizations. These events drive demand for our products as our insights enable clients to make sense of the overwhelming volume of unstructured regulatory and macroeconomic information. Historically, managing this information has been labor-intensive and opaque, representing a significant untapped opportunity for AI to structure, normalize, and digitize it. FiscalNote is better positioned than ever to assist the world in understanding global policymaking dynamics, from military conflicts in Eastern Europe to renewing public relationships after the most severe pandemic in a century. We are only at the beginning stages. For example, Europe is one of the most regulated markets, yet only 10% of our revenue comes from there. We are in the early phases of our European expansion, and I believe we can build a business there comparable to our North American operations with our current product lineup. Additionally, we're pushing boundaries through continuous innovation and expanding into areas like ESG and compliance for future growth. Overall, we see numerous opportunities for FiscalNote to capture the large market for legal, regulatory, and policy information. The second key component of our fundamentals is our scalable operating model, which will allow us to convert incremental revenue into operating profits long-term. Our model is simple: we have demonstrated mid-teens organic growth, complemented by our M&A strategy for tuck-in acquisitions that enhance our reach and cross-selling efforts. We renew clients each year and deepen relationships by introducing new data sets and products. This is our proven model for compounding recurring revenue growth. With this model, we maintain adjusted gross margins around 80%. We've also established a strong operational foundation in R&D, sales and marketing, and G&A to support a large, growing public company at the forefront of AI, now with global operations across various cities, enhancing our reach to seize global opportunities. We can build on this foundation to stimulate growth further. In addition, as Jon will outline, we are implementing efficiencies within our organization through technology and workflow improvements while identifying areas to cut expenses. Most importantly, we have a distinct competitive advantage, which is a unique and defensible combination of data, AI, and human intelligence. Over the past decade, we have gathered an extensive amount of data that is highly relevant to government and private sector interests. Our comprehensive AI platform helps aggregate, synthesize, and structure this specialized data. Furthermore, our human expertise and software workflows make this data actionable for our clients. Our AI models also benefit from insights gained from numerous customers daily, enriching our offerings. This robust combination of AI and data creates our sustainable technology foundation. As we've seen across various industries, significant advancements in artificial intelligence are occurring, which is particularly promising for FiscalNote, as these advancements enhance our business through increased demand and operational efficiency. We believe the integration of general AI models with domain-specific models will further bolster our defensible insights and enable us to optimize data collection while developing innovative applications that enhance efficiency for our clients. The benefits of AI advancements should manifest in multiple ways: improved customer experiences through faster prototyping and data collection, and greater personalization, content dissemination, and automation for efficient customer service and engineering operations. We’re committed to incorporating AI at every level of our company to drive competitive advantage and differentiation and improve operating margins. Additionally, our collaboration with OpenAI showcases our market leadership in AI, utilizing cutting-edge technologies to enhance user interactions with language models, fostering future product development. In summary, our team understands we are building a streamlined business with solid fundamentals while employing a resilient capital allocation model for long-term growth and cash flow. That is precisely what we have established at FiscalNote. Our capital management strategy supports our primary goal of becoming a profitable leader in our sector. We aim to allocate time and resources toward actions yielding the highest returns and minimizing shareholder dilution. With our strong fundamentals of recurring revenue and high gross margins, we believe we possess more flexibility than some competitors to invest in high-return areas. Consequently, as a team, we maintain a cost-focused mindset, emphasizing efficient capital allocation. We continuously seek efficiencies in our business while fostering innovation for the future. With sufficient cash on hand and access to funding, we are well-prepared to support our growth and M&A efforts. Achieving our adjusted EBITDA profitability goal this year will position us to drive margins similar to other leaders in information services. Before I pass it to Jon, I want to comment on the dynamics in public markets. Fundamentally, we are in a strong position: we continue to grow, maintain strong relationships with customers through our retention and subscription models, support high gross margins, and generate long-term free cash flows. Despite this, there is a noticeable disconnect between our robust business fundamentals and public market valuations, which we believe is temporary. As long as we continue to deliver strong fundamentals, we will find ways to create shareholder value over the long term. Our management team's focus is on building a sustainable growth company that offers exceptional products and services for our long-term customers while maintaining a high gross profit rate for future reinvestment. Even with short-term fluctuations in the market, our leadership remains steady, and the long-term potential for FiscalNote has never been clearer. As the investor Benjamin Graham stated, in the short term, the stock market is a voting machine; in the long term, it’s a weighing machine. In 2023, we are in an environment where recurring revenues, high gross margins, long-standing customer relationships, experienced management teams, and differentiated technology are critical. When the capital market dust settles and identifies businesses with solid fundamentals, we believe FiscalNote will prove itself as a valuable company. In summary, looking back on 2022, I am pleased with our progress. We are positioned to benefit significantly from global policy complexity amidst various political, economic, and operational challenges. We are enhancing our growth model through a mix of organic growth and accretive M&A, backed by a diverse customer base. We're establishing a resilient business within a growing market with continuous opportunities for revenue and innovation. Our advancements in AI boost customer differentiation and enhance operational efficiency, giving us a data advantage. We are fulfilling the commitments from our last call by achieving the high-end of our revenue guidance, strong net retention, and high gross margins. We are executing our 2023 growth plan, with a clear path to profitability while being fully capitalized. This approach will lead to growing free cash flow margins, reducing our cost of capital, and supporting our business's future growth. Finally, we are led by a disciplined and capable management team focused on sustainable growth and smart capital allocation to build a lasting company for the future. Every day, we strive to earn the trust of major companies, governments, and individuals who rely on FiscalNote solutions to navigate the effects of government policymaking on their organizations. This is at the heart of our vision, and I remain passionate and optimistic about our future growth opportunities. Now, I will hand it over to Jon to discuss our financial performance and outlook.

Thank you, Tim, and good morning. I will provide further details on the fourth quarter and fiscal year 2022, as well as discuss our financial performance expectations for this year and our plan to achieve positive adjusted EBITDA and eventually positive free cash flow. Let me begin with revenue. In the fourth quarter, we recorded revenue of $31.4 million, which represents a 29% increase year-over-year in total and an 18% increase on an organic basis. For the full year 2022, revenue was $113.8 million, showing a 37% year-over-year growth in total and a 15% increase on an organic basis, excluding acquisitions and Sunset revenue from 2021 and 2022. Our non-GAAP revenue was $115.7 million for the year. We are demonstrating our strategy of achieving consistent growth, supported by mid-teens organic growth and strategic tuck-in acquisitions that allow us to cross-sell and upsell to our customers. This has been our track record, and we anticipate continuing this revenue performance. Subscription revenue in the fourth quarter, which constitutes nearly 90% of our total revenue, was $27.3 million, an increase of $6.4 million or about 31% from the previous year, reflecting 15% growth on an organic basis. For the full year 2022, subscription revenue exceeded $100 million, marking an approximate 36% growth year-over-year and 13% organic growth. Our advisory advertising and other revenue reached $4.1 million in the fourth quarter and $13.2 million for the year, growing 49% year-over-year. We ended 2022 with run rate revenue of $127 million in total, which indicates a 14% year-over-year growth. Run rate revenue is calculated as annual recurring revenue plus non-subscription revenue earned over the past 12 months and is a key metric for management, serving as a baseline for the coming year. On an organic basis, the run rate revenue stood at $125 million, also showing 14% growth on a pro forma basis. We increased our total annual recurring revenue, or ARR, to $113 million as of December 31, which is a 14% increase from the same time in 2021. Organic ARR at year-end was $112 million, reflecting a 15% growth rate compared to our ARR at December 31, 2021, on a pro forma basis. We concluded the year with a net revenue retention of approximately 100% on a trailing 12-month basis. Although NRR rates can vary slightly from quarter to quarter, we are pleased to achieve the 100% mark, confirming FiscalNote's build and buy strategy, which leverages strong customer relationships through effective cross-selling and upselling. Regarding gross profit, we maintain strong margins. Our gross profit for Q4 was $23.1 million, which represents a 73% margin. Our non-GAAP gross margin for the fourth quarter was $25.6 million, reflecting an 81% gross margin after adjustments for deferred revenue and amortization. For the full year 2022, our gross profit was $81.8 million, equating to a 72% margin, while our non-GAAP gross profit was $92.8 million, indicating an 80% gross margin. Sales and marketing costs for the year totaled $42 million, with the notable increase largely attributed to acquisitions. R&D expenses reached $20.7 million for the year, down about $4 million from the previous year, partly due to increased software capitalization. Editorial content costs for 2022 were around $16 million, a $1 million increase from last year. G&A expenses were $77 million in 2022, which included approximately $37 million in noncash items associated with stock-based compensation expenses from our public listing transaction. After excluding noncash charges, G&A was approximately $39.5 million, representing an $11 million increase from the previous year, primarily driven by higher public company expenses. Our total interest expense for the full year was $95.7 million, which included substantial one-time noncash charges from converting legacy convertible notes during our business combination and public listing. Our fourth-quarter interest expense of about $6 million reflected our cash and noncash interest expenses given our current debt profile. Moving forward, we expect to pay roughly $4.5 million to $5 million in cash interest each quarter. Additionally, our net loss in 2022 included a noncash charge of $11.7 million for a loss contingency tied to a previously announced lender settlement agreement. Offsetting some one-time charges, we recorded a noncash gain of about $16.1 million from the mark-to-market of public and private warrant liabilities and a $7.7 million noncash gain from the forgiveness of the company's PPP loan. The GAAP net loss for fiscal year 2022 was $218 million, which is reconciled to our adjusted EBITDA loss of $24.4 million in our press release. Our balance sheet is solid, with $61.2 million in cash and cash equivalents as of December 31. We regularly conduct thorough cash forecasting and scenario planning. We have enough capital to support our growth initiatives and fund our plan for positive adjusted EBITDA in the fourth quarter of this year and beyond. Furthermore, we are taking actions to reduce our cash expenditures. For our guidance in 2023, we forecast run rate revenue between $148 million and $155 million, including the recent acquisition of Dragonfly and excluding any future acquisitions we may pursue. We anticipate GAAP revenue between $136 million and $141 million, indicating a growth of 20% to 24% year-over-year when accounting for Dragonfly. On an organic basis, we expect to achieve another year of mid-teens organic growth. As for revenue cadence throughout the year, those familiar with FiscalNote know that a significant portion of revenue growth typically occurs in the third and fourth quarters. Our sales team is well-staffed and optimized for growth, which should lead to increased recognized revenue throughout the year and into 2024. We expect adjusted gross margins to be around 80%, and adjusted EBITDA loss to fall between $8 million and $6 million for the full year, with an aim to achieve adjusted EBITDA profitability in Q4. For the first quarter, we project revenue between $31 million and $32 million, with an adjusted EBITDA loss of $7 million to $6 million. While this anticipated adjusted EBITDA loss may seem elevated compared to our annual guidance, Q1 will include $1.5 million in seasonal public company costs related to our first-year audit following our listing and lower-than-usual revenue recognition from nonrecurring revenue. In terms of operating expenses, we have implemented measures to cut costs to enhance efficiency and productivity. These efforts will yield significant benefits that will translate into meaningful bottom-line improvements beginning in Q2 and Q3, leading to adjusted EBITDA profitability in Q4 of this year. This encompasses numerous initiatives across the board, including adjusting our talent allocation models and locations, directing revenue-generating teams toward the highest potential clients and market segments, streamlining our internal processes and workflows, and reducing expenses with external contractors and vendors. For instance, we have relocated most of our customer support teams to more cost-effective offshore locations, improved business development productivity by changing our service model and coverage ratios, consolidated product development and related R&D teams, and eliminated many external vendors, greatly reducing our spending with several larger technology providers. We continue to actively assess and restructure our business processes and operations across the company, anticipating additional savings in 2023 thanks to these ongoing initiatives. Consequently, these improvements are driving a strong conversion of incremental revenue into adjusted EBITDA. Specifically, in 2023, at the midpoint of our guidance, we expect to add approximately $25 million in incremental revenue year-over-year. With adjusted gross margins at 80%, this is projected to generate about $20 million in incremental gross profit. During this period, we plan to add only $3 million to $4 million in marginal operating expenses, including acquisitions. This would translate to an EBITDA improvement of $17 million year-on-year. We are achieving this by realizing $6 million to $7 million in in-year expense reductions from the efficiencies I mentioned. Beyond 2023, we will continue to drive strong EBITDA conversion while maintaining high adjusted gross margins and leveraging our relatively fixed operational foundation. As Tim highlighted, we are actively pursuing mergers and acquisitions, which have been and will remain a core part of FiscalNote's long-term growth strategy. We are being selective to ensure we choose the right targets at appropriate valuations, focusing on opportunities that directly address our customers' most urgent needs and will facilitate predictable and sustainable compounding growth and accretive EBITDA. We have consistently been resourceful in structuring our acquisitions. At our current stock price, we will keep utilizing structure to limit dilution for existing shareholders. We have successfully employed this method in the past and have a strong pipeline of actionable opportunities that reflect the current M&A landscape. Moreover, our lenders continue to be flexible and supportive of our focused strategic acquisition program, as evidenced by our recently filed updated credit agreement. Lastly, I would like to address our cash position and future liquidity. As stated earlier, FiscalNote concluded 2022 with $61.2 million in cash on the balance sheet. This cash balance is sufficient to support our anticipated growth and trajectory toward adjusted EBITDA profitability later this year, as well as free cash flow. For context, under our current operational model, we estimate our cash balance will exceed $30 million in a year without needing additional equity injections. FiscalNote is fully capitalized and has no plans for further equity capital raises. We operate with a bottoms-up budget and a multi-year strategy. We consistently track performance, respond to variances, and update monthly forecasts to ensure we stay on track to meet financial expectations. As discussed, we have implemented measures to cut our operating expenses and continue optimizing operations across the board. We are prepared to take additional actions if needed in the future. Additionally, we are aggressively working to accelerate free cash flow and will provide more updates in future calls. In closing, we are achieving top-line growth as we follow our strategy to build a profitable, compounding growth business that offers mission-critical solutions to the world's key decision-makers. We are benefiting from continuous trends that drive demand for our services, from increased regulation to geopolitical complexity to macroeconomic uncertainty; only FiscalNote possesses the extensive AI-enhanced data and human intelligence necessary to help clients navigate this growing operational complexity. Demand for our offerings is strong now and will continue to rise as we expand our data, workflows, and new adjacent solutions, all while maintaining highly predictable recurring revenue, strong gross margins, and ongoing cost management. Our path to profitability is clear and accelerating, and we have the operational structure and capital required to scale and create long-term value in this business. We look forward to collaborating with you, our shareholders, as we work towards establishing a lasting market leader for the future. Now, I will turn it over to the operator for any questions.

Thank you. Our first question comes from Matt VanVliet from BTIG.

I guess, first, Tim, you mentioned that Europe could be as large potentially as the U.S. market, but only 10% of the company today is coming from that region. Maybe walk through kind of what the recent hiring plans have been to expand in that market? What other additional investments are you expecting over the next couple of years? And then ultimately, kind of what kind of revenue growth or other growth metrics you can share? Are you expecting in both '23 and maybe '24 from Europe specifically?

Yes, thank you. I appreciate the question. So I think the first thing is that we have been in the European market for a couple of years now. We started off in the Brussels market by really looking at European Commission information, European data information in addition to information coming from different member states. And that's really just a reflection of the continued expansion of the data and opportunities that we see overall in the market. Additionally, over the course of the last couple of years, we have made a number of acquisitions in the European market that have expanded the scope of our footprint as well as the customer base that we have in the marketplace. So I'll point you to a couple of companies like Oxford Analytica, Dragonfly, and most recent acquisitions, DT Global and others that have expanded our footprint throughout the United Kingdom as well as Western and Eastern Europe. Those acquisitions by themselves actually constitute the beginning foundations of what we see as a larger European opportunity. And so a couple of different things. The first thing is just the continued application of our technology in the European market enables us to have to add more data for our customers. The second thing is just the reality that there's a large number of multinational companies and European governments that we continue to be able to sort of bring into our overall customer roster. We're not really giving guidance right now, particularly to the European market, but it is a very big focus of ours as a management team, and it's something that we're continuing to keep an eye on here.

Okay. Very helpful. And then when you look at the recent partnership announcement with OpenAI, I know you expanded on a little bit on the call, but curious in terms of how you’re thinking about that being sort of a product or monetizing that partnership? Is it something that eventually you’ll turn into or build out specific use cases or products around? Or is this really geared towards enhancing the current platform and just sort of pushing ahead on your competitive advantage there in which you can either cross-sell a little bit more of that or raise prices over time to include that functionality?

I believe the partnership with OpenAI reflects our long-term investment in artificial intelligence and data collection within the legal and regulatory sectors. As noted in our press release, we are the sole legal regulatory partner for OpenAI's chat GPT plug-in program. There are several key areas we are focusing on. Firstly, we are enhancing customer experiences as interactions with technology are evolving, allowing us to improve customer experiences quickly. The integration of these new technologies showcases our ongoing ability to innovate and incorporate advanced capabilities. We previously mentioned aspects like personalization, improved search relevancy, and enhanced data collection efficiency, all of which will benefit our customers due to our data collection efforts and broader partnerships, including with OpenAI. Lastly, I want to emphasize that we anticipate some efficiencies from automation, which will lead to quicker market entry, lower R&D costs, and faster product innovation cycles. These improvements will directly influence our financial performance. We expect that the combination of superior customer experiences and streamlined R&D operations will significantly benefit the business overall.

Great. And then, if I could just squeeze one last one in around the SBB, I guess, issues going on there. Any impact that you're seeing on the M&A pipeline directly from that or valuations sort of, I guess, resetting lower on some of the fallout there. Any update on the M&A pipeline around sort of recent events would be very helpful.

I don’t think that the SBB situation has had a material impact on M&A, but I will comment that from a macroeconomic perspective, we are seeing a large number of deals come across our inboxes. And so as we evaluate those deals, we have seen a material shift in terms of expectations of folks as well as the expectations around structure or price. We are constantly evaluating deals every single week, and we are trying to make good decisions around the types of markets we want to be in and the types of products we want to be in. And of course, the way that we structure those deals to minimize dilution for shareholders and ultimately drive the most equity value for the business. So in short, no impact from SBB, but obviously, there are broader macroeconomic impacts here.

Our next question comes from Mike Latimore from Northland Capital Markets.

Yes. Congrats on the strong finish to the year there. I guess just on the last comment there. So you said that you saw a material shift in expectations. But basically, is the point there that just valuation expectations have been coming down this year? Is that the point?

Mike, it's Jon Slabaugh. We have seen expectations kind of rationalizing not only in terms of headline value but also the willingness to work around structure, inclusive of structure consideration and earn-outs. So I think that it's fair to say that the types of transactions that we've been looking at are actionable at lower multiples than maybe previous years.

Okay. Got it. Great to see the NRR over 100%. I guess, do you view that as sustainable? Or could that improve this year? And maybe touch on 1 or 2 points that really kind of moved it over 100% during the year.

Sure. We've asked Josh Resnick, our President and Chief Operating Officer, to join us here on the call, and I'll let him comment on that.

Hi Mike. Yes, I can address that on NRR. So you can expect to see NRR continue to remain relatively consistent, should fluctuate quarter to quarter, but remain relatively consistent. We're very focused on hitting the two key levers to drive it: gross retention and upsell, cross-sell. And with a lot of the changes that we've been making on the revenue side, in particular, we've been seeking a lot about how we structure our account management and customer success functions to help drive that on the retention side, in particular. And with our new Chief Revenue Officer in place, have been adjusting our go-to-market focus to help drive new logo sales as well.

Okay, great. Can you discuss what you've observed in the fourth quarter and first quarter compared to the third quarter regarding deal sizes and sales cycles, and perhaps differentiate between the government and commercial sectors?

Sure. We had talked back in Q3 about seeing some pauses and a little bit of hesitancy in the private sector. We saw that continue into Q4, mainly in new logo in the enterprise. We’re still seeing some budget hesitancy which is factored into our guidance for the year. We still believe our solutions are critical, which is what’s still driving this – the mid-teens organic growth that we’re forecasting. We’re helping enterprises with existential issues that they have around risk and opportunity could be cybersecurity, data privacy regulations, expansion, and contraction of lines of business. So we’re still seeing a tremendous amount of value, and we’re seeing our ACVs grow. So we feel like there’s a lot of help there, although still from the macro environment still driving a bit of that budget presence, especially on the enterprise side. So continuing to see a balance of growth in the private and public sector, although public tends to be that kind of steadier, more reliable backbone, and we expect to drive more growth through the private sector going forward.

But in terms of that private sector dynamic, any change since the third quarter? Or is the environment similar to what you saw in the third quarter?

I think the environment is still generally similar. Still trying to work through a lot of the malaise in the macro environment that you see and hoping to see some improvement as the year goes along. But again, we factored that into our guidance for the year.

Yes, great. And then, just last on the few acquisitions you made over the past year. Can you talk about whether you have seen improved growth rates or good cross-sells or just a little bit more on the traction from the most recent acquisitions?

We've observed significant acceleration from the acquisitions. Later, when we file the 10-K, there will be detailed breakout information. I can tell you that our legacy business grew by 11% year-over-year, while the acquisition cohort from 2021 and 2022 experienced growth rates of around 23%. This demonstrates the success of integrating them into our platform, providing them access to our customer base, and allowing our business development team to enhance revenue growth.

Our next question comes from Rudy Kessinger from D.A. Davidson.

Jon, you mentioned that in a year you anticipate having around $30 million in cash. Does this mean you expect to have a cash burn of $30 million or less over the next 12 months? And is this estimation considering any potential future acquisitions, or is it based solely on the current core business without accounting for acquisitions?

Sure. That's excluding any acquisitions you might do between now and then, it's the operating model that we've built for the business as it stands today and taking into consideration growth, operating expense, the CapEx and seasonality of the business as well. And just as a point of clarification that when I say a year from now, I'm referring to a year from today as well.

Okay. So effectively end of Q1 2024, not Q4 2023. What is the go-forward interest expense? I don't know if you can break it out, especially for Q1 or for the full year, but it was roughly $6.1 million in Q4. You made another acquisition in Q1 that added some more debt, and rates have changed. What is the go-forward interest expense for Q1 and calendar year 2023?

I think I referenced this in the call, the cash interest expense is $4.5 million to $5 million. And in light of the recent changes, you might use the higher end of that range.

Okay. I think you might have broken up at the end of the year. And then maybe just one last for me. In Q4, I know we'll get this in the 10-K, but how much revenue came from DT Global and Aicel in Q4? And then when we look at your revenue guidance for '23, how much revenue do you have baked in there from Dragonfly, DT Global, and Aicel?

In Q4, the revenue from those two entities was 3,000. Looking ahead to the upcoming year, the guidance we provided included a range for Dragonfly revenue, which was 6.5 million pounds or about 7 million dollars. You can exclude that amount from the guidance range. Therefore, after making that adjustment, the organic growth rate for Dragonfly would be approximately 13% to 17%.

Okay. Got it. That’s it for me.

We may do some work to back out Aicel in Data Hunt specifically if that's something you want to follow up on.

For D&A?

Yes, D&A.

Our next question comes from Mike Albanis from Hutton.

Congrats on a nice Q4, and so I finish to the year. I just had one clarifying question for you. I think about 2023 guidance; I think you mentioned additional at the midpoint, an additional $25 million revenues, 80% margin, so $20 million incremental gross margin and then an incremental 3% to 4% in OpEx kind of on top of your current, I guess, cost basis plus some savings that you had talked about. Can you just kind of walk me through that one more time?

The increase in operating expenses is mainly due to the addition of Dragonfly, which brought in both revenue and some associated costs. So far, we have managed to reduce operating expenses by $6 million to $7 million for the year. This figure might be closer to $12 million on an annual basis. We are making adjustments with Josh and his team, and we will continue to do so throughout the year.

We have no further questions. I'd like to turn the call back over to Tim Hwang for closing remarks.

Great. Well, I want to thank everybody for joining us on the call here. We obviously had a great full year in 2022. We've given guidance on a positive and really exciting 2023 here. And so really look forward to our next call, and appreciate everybody jumping on the call here. Thank you very much.

This concludes today's conference call. Thank you for your participation. You may now disconnect.