FiscalNote Holdings, Inc. Q3 FY2023 Earnings Call

Good morning. My name is Wilson, I will be your conference operator today. At this time, I would like to welcome everyone to the FiscalNote Third Quarter 2023 Financial Earnings Conference Call. I will now turn the conference over to Sara Buda, Vice President of Investor Relations. You may begin.

Hi, everybody. Welcome to the FiscalNote Q3 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 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 the 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 portions of our website for a reconciliation of these measures to their most 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, Sara. On today's call, we will review our third quarter results, which mark our first quarter of adjusted EBITDA profitability. This is a tremendous milestone for the company. A year ago, we committed to adjusted EBITDA profitability, and that is exactly what we've delivered. In fact, we've delivered this one quarter earlier than we originally forecast, even amidst the more challenging macroeconomic environment. If you look at where we were when we began this year, we've shifted our adjusted EBITDA from a minus $7 million per quarter loss in Q1 to positive adjusted EBITDA in Q3. This is an annualized improvement of over $30 million in adjusted EBITDA, compared to where the company started this year in Q1. We have been laser-focused on this milestone, and we are delighted to achieve it ahead of initial expectations. At the same time, we have made significant investments to accelerate our decades-long leadership in AI, aligned our sales teams on the highest growth customers, and refined our product portfolio. Now, as we end 2023, it is time to build on this foundation and turn our focus toward re-accelerating growth. I'll get into the details of that growth strategy shortly. First, let me remind you of our mission here at FiscalNote and the value we bring to more than 5,000 customers every day. At FiscalNote, we're on a mission to help our customers make sense of the complicated and costly changing world we live in by delivering a proprietary, AI-enabled platform that aggregates, organizes regulatory, political, and macroeconomic information and analyzes the impact on their organizations. Changes in policies, regulations, and laws impact the decision-making of almost every organization around the world. Using our proprietary AI capabilities, we aggregate, synthesize, and analyze massive 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 have built an enduring company for the world's most important and influential decision-makers, from hundreds of government agencies and public sector customers from the Department of Defense, the White House, every member of the House and Senate in the US Congress, the Federal Reserve, and public sector organizations in Europe and Asia to major corporate customers, including more than half of the Fortune 100. Beyond large enterprises, FiscalNote serves a wide and diverse range of business customers, ranging from healthcare and pharma, financial services, technology, energy, food and beverage, transportation, automotive industries, and beyond. These customers rely on FiscalNote every day to discover, process, and navigate the impact of real policymaking on their organizations and, more importantly, to take actions that achieve their business objectives and minimize political and economic risk. This forms the basis of our durable and long-term growth. Helping our customers analyze over $6.4 trillion in government spending and tracking over 500,000 elected officials in the United States, along with similar policymakers around the world, is an immense digital challenge. One that requires unrivaled information about the need-to-know policies, embedded workflows to manage regulatory risks, and powerful analytics and research to understand mission-critical updates with every global conflict, every time the United States and China get into a spat over semiconductors, and every other new tariff, sanction, regulation, and geopolitical dispute. The disclosed data and information are more relevant than ever to help companies navigate through an increasingly challenging and complex world. This is a $37 billion market opportunity that companies spend every year trying to obtain this critical information and data. We have become an increasingly critical and ubiquitous Bloomberg terminal of political, legislative, and regulatory information at the local, state, federal, and global levels. The same way that other information companies such as S&P Global, IHS Markit, and Morningstar have innovated in their respective information fields. This will continue to deliver mission-critical information that has a direct impact on their customers' operations and create an entirely new category within the data information services space. We've invested tens of millions of dollars in almost 10 years building a defensible combination of data, intelligence, and AI technology to collect, synthesize, and make sense of the exploding pace and volume of dynamic, unstructured regulatory, political, and legal information around the world. Our software workflow tools help our customers respond, forming the basis of our market leadership position and our durable growth strategy. Further, with our AI pedigree and our vast array of validated trusted data, we are in a unique position and have a clear competitive advantage. We are a compounding growth company with a broad and diverse customer base against the backdrop of increasing global complexity and uncertainty, which we believe only Fiscal could address with our unique and proprietary products and datasets. Now, let me provide a brief summary of our Q3 results and our ongoing momentum as we reach the inflection point of adjusted EBITDA profitability next quarter and beyond. In Q3, we delivered another strong quarter of growth with revenue of $34 million. This marks an increase of 17% year-over-year and is yet again consistent with the guidance we provided. We also enjoy consistent high gross profit margins. Q3 adjusted gross profit margins were 83% in the quarter. These margins are hallmarks of Fiscal and stem from our SaaS business model, AI pedigree, and data-rich products, all of which form the basis for strong free cash flow in the future. On the bottom line, our third-quarter adjusted EBITDA was positive $700,000 in line with the guidance we provided on the last call; our cash and short-term investments in the third quarter were $24 million. Turning to management KPIs, we delivered run rate revenue of $138 million. Our annual recurring revenue, or ARR, was $123 million, reflecting growth of 14% year-on-year and growth of 8% on a pro forma basis. Our net revenue retention increased to 100% driven by ongoing success in our large enterprise customer base, where net revenue retention continued to be well above company average. So now let's turn to the nuts and bolts of the business. First, we'll review the things that are going well. Second, we'll look at the things we need to improve on. And third, we'll discuss the pathway for the company moving forward to accelerate the growth we've achieved toward profitability. First on the things that are going well: we are now profitable on an adjusted EBITDA basis. For the last year, considerable management time and attention has been placed on this goal. This delivers a tremendous inflection point of delivering positive adjusted EBITDA for the first time in the company's history and one quarter earlier than initially forecasted. We enabled strong operating leverage, driving 160% conversion of incremental revenue to adjusted EBITDA this quarter. To achieve this, we took a number of actions, including reducing our G&A for efficiency, reducing our editorial and other expenses, shifting our R&D expenses, and making hard decisions about product spending, and sunsetting unprofitable products. We made major changes to our sales team to focus on large enterprises with larger annual contract values. This has proven to be the right strategy with impressive outcomes. By shifting our R&D spending to higher-value, higher-growth products, we have reinforced our competitive moat and secured AI partnerships with market-leading organizations that recognize and accelerate the applicability of our market-leading data, intelligence, and AI. We have brought to market successful new products such as Risk Connector and FiscalNoteGPT, which are both starting to gain traction in the market. By aligning our sales team and reallocating resources to focus on large enterprises with larger annual contract values, we have turned large enterprises into our largest fast-growing customer group, with net revenue retention rates well above the company average, trending well above 105% on a last twelve months basis. There’s more upside here as we introduce new enterprise products with higher annual contract values and continue to upsell and cross-sell. By modifying our go-to-market model and reallocating sales and marketing spending, we are starting to drive growth in the areas of business with the strongest upside potential. More importantly, by taking cost actions across the organization, we have achieved adjusted EBITDA profitability and have an initial plan and positioned the business for very strong conversions of incremental revenue to adjusted EBITDA profit. Ultimately, we have created a durable and profitable company with highly innovative products and a superior market leadership position. We expect the company will continue to see strong conversion of incremental growth into adjusted EBITDA in the long term. Overall, the company has spent the last decade building an operational and technical infrastructure that is poised for rapid growth. With global operations ranging from Washington D.C. to London to Seoul and Sydney, the company has an extremely talented management team, data, technology, and AI organization, as well as the go-to-market infrastructure to continue to grow. The changes we have made have resulted in a leaner, more disciplined organization poised for growth. All of this is a testament to the hard work and dedication of our teams and the unparalleled value we deliver to our 5,000 customers every day. So where do we see areas of improvement for the business? Candidly, we are watching two data points very closely within the business. First, while we have seen substantial growth in our subscription business, we have encountered some challenges in our one-time non-subscription revenue, which is typically very strong in the second half of the year. With a challenging macro and some underperformance of a few non-core products, this one-time non-subscription revenue didn’t deliver on pace with their traditional seasonality. Second, we faced slower than expected pipeline conversions as we shifted toward larger strategic accounts, which are taking longer than expected to close, also due to the macroeconomic environment. While we have retooled our product strategy to go after larger customer accounts, launched new products and features, and structured our go-to-market teams to pursue these deals, under the current macroeconomic environment, these opportunities are receiving more scrutiny from company leadership. So what is the company's plan to reignite growth and profitability? Now that we've achieved the inflection point of adjusted EBITDA profitability, it's time for us to shift our management time, focus and attention to allocating our resources and capital to accelerating growth. This is the singular focus of the operating team to drive sustained growth within the organization, as we have done for the past 10 years. Fundamental to this growth reacceleration is a refined product strategy, where we drive incremental upside to the durable base of revenue we have in place today. Let me give some context. First and foremost, we will sustain and build upon our core products with the strongest demand profiles. Our regulatory and policy data solutions continue to be the strongest offerings in our portfolio, with robust demand. Organizations are facing a significant increase in regulatory complexity, which is spreading globally, creating uncertainty for all organizations, affecting their top-line and bottom-line performance. We have spent the last decade applying our proprietary AI expertise to structure, normalize, analyze, and digitize vast amounts of information: regulatory, legal, macroeconomic, and geopolitical. We will continue to invest and build upon the success of these core products, with new product enhancements, datasets, and AI workflows that reinforce our competitive position and bring unparalleled value to our customers. We believe there's ample opportunity to expand our land and expand strategy with large customers as we continue to upsell and cross-sell legal and regulatory datasets. Second, we will pursue adjacencies to core products in fast-growing areas of risk and compliance. This includes products such as Risk Connector, our new internally developed risk intelligence solution that enables enterprises to reveal operational, relational, and reputational risk. Risk Connector brings the power of our proprietary data and AI capabilities to map relationships and identify risks within the organization's supply chain, customers, investors, partners, and any other dimensions through which risk can emerge. This empowers large organizations in both the private and public sectors to anticipate, quantify, and track risks from their operations and relationships in a way that current solutions cannot achieve. Only a few weeks after public launch, we already have our first anchor customer and several other active proposals in the market with large enterprises. We are delighted with this early momentum in this new product, which exemplifies our AI leadership and commitment to innovation that delivers customer value. Risk Connector is just one example of a product adjacency. We also continue to pursue geographic adjacencies. This year, we invested in our expansion in Europe, both organically and through acquisitions, allowing us to provide new datasets to our customers. Finally, we are investing in new generative AI capabilities for our customers with a new go-to-market strategy that we expect to result in faster revenue generation. We are shifting our product strategy to focus on AI Co-Pilot agents. Our first new product initiatives are our fiscal AI Co-Pilot program, through which we are developing a series of AI-enabled applications that provide intelligence systems for policy and risk management professionals. The Co-Pilot program leverages our decade-long investments in AI, ML, and NLP, proprietary reasoning and data aggregation tools, as well as vast proprietary and public verticalized datasets. The goal of FiscalNote is to launch a constellation of AI agents that include quick applications coded to specific use cases. The intent is to automate the day-to-day tasks such as creating legislation, drafting regulatory and legal analyses, advocacy outreach, and conducting constituent communications and responses. In doing so, Co-Pilot will significantly reduce the number of hours that our customers spend on drafting legislation, responding to legislation, and communicating with constituents among other tasks. These Co-Pilot features will be built on our FiscalNoteGPT generative AI platform, enabling a new array of FiscalNote products that are easy to sell, deliver, and scale across users. The value to FiscalNote customers is clear, as we enable existing and potential customers to leverage our AI-powered solutions to complete their tasks faster, with high levels of confidence. The rationale for this Co-Pilot program is evident; despite major advances in AI and the use of large language models in the technology sector, there remains a crucial need for organizations to address the unique complexities in the legal and regulatory landscape. With our expertise in data ingestion, cleansing, and curation, as well as our extensive archive of legal and regulatory datasets from around the world, it makes sense for FiscalNote to fill this void with our FiscalNoteGPT and now our new AI Co-Pilot program. This strategy complements and builds upon our integration with major language model providers like OpenAI and Google. Our new Co-Pilot focus will allow us to develop new go-to-market models based on expectations for per-user pricing. We expect these products to be offered on a per-user basis, enabling individuals to purchase them with ease, thus facilitating mass adoption of our generative AI tools and ensuring quicker revenue generation. We anticipate rolling out our Co-Pilot strategies over the coming weeks and months as we build a constellation of AI agents leveraging our data. Our Co-Pilot program marks another step in FiscalNote’s ongoing leadership as we develop and market AI-enabled solutions aimed specifically at the legal and regulatory sector. You can expect to hear more from us in the coming weeks regarding FiscalNote and our Co-Pilot program, alongside other new product developments that will provide incremental growth paths to complement our durable base of recurring revenue solutions. In summary, we have made many changes during 2023 as we dedicated our time, energy, and resources toward achieving profitability. We are now pivoting our focus to new avenues for accelerating growth in 2024 and beyond, with a refined three-pronged product strategy and go-to-market approach that will enable us to build upon our core products with the highest growth potential, pursue natural adjacencies to broaden our value to customers, and develop new products with new channels for growth. This reflects our ongoing commitment to building a durable, profitable, compounding growth company that provides unique value to the world's most important decision-makers while scaling this business to $200 million, $300 million, $500 million, and $1 billion in recurring revenue and beyond. Separately, you all saw the disclosure that I informed the board of my interest in exploring and leading a going-private transaction. As a result, the board has appointed a special committee to evaluate any proposal I might submit in light of the company's strategic options and the best interest of shareholders. While I cannot comment further, I will reiterate what I've stated on our past calls: we have approximately $140 million in run-rate revenue, a proven durable and compounding recurring revenue model with more than 5,000 customers, 80% adjusted gross margins, and now have achieved adjusted EBITDA profitability. The business has never been in a stronger position; yet our stock price does not reflect the strength of these fundamentals. We continue to trade well below other sector-specific information service leaders. Ultimately, we will always do what is in the best interest of shareholders to achieve a valuation that recognizes and reflects our fundamentals and future growth opportunities while building a long-term market leader in AI-driven Information Services. Regardless of the outcome, the entire organization remains committed to growing our business in a way that delivers value to the world's most important decision-makers who trust FiscalNote to discover, process, and navigate the impact of policymaking on organizations, and to take actions that realize their business objectives and minimize political and economic risk. Now, let me turn it over to Jon for details on the financials and our outlook going forward.

Thank you, Tim. And good morning. I'll spend some time going through the details of our quarter and then I'll walk through some of the operational changes we've made in our commitment to ongoing adjusted EBITDA growth moving forward. Let me start with the quarter. Third-quarter GAAP revenue was $34 million, marking year-over-year growth of 17%. Third-quarter subscription revenue, which makes up approximately 90% of our total revenue, was $30.1 million. This is an increase of 15% from a year ago and 7% growth on an organic basis, excluding the non-cash deferred revenue adjustments from 2022. Our advisory and other revenue was $3.9 million, an increase of $1 million year-over-year. We exited Q3 with run-rate revenue of $138 million in total, marking 14% year-over-year growth. On an organic basis, our run-rate revenue was $129 million, reflecting 7% growth on a pro forma basis as defined in a press release. Net revenue retention for the quarter was approximately 100%, representing a sequential quarter increase of 200 basis points and a year-over-year increase of 100 basis points. Let me provide some more details here because it is important to see the traction among our various customer groups. As you know, we have three primary customer groups we serve: public sector, not-for-profit associations, and enterprises. As we said, enterprise is our largest customer group, and large enterprise and strategic accounts represent the fastest growing, highest net revenue retention customers. This quarter reinforced that this is the right strategy. Net revenue retention rates among our large enterprise corporate customers continue to trend above the company average. Demand for our regulatory and policy data continues to be strong, particularly among large enterprises. As a result of some of the recent changes we've made concerning product strategy, sales allocation, we see opportunities for net revenue retention rates in this large enterprise group to expand further. Like many companies, we tend to see a bit more churn in the small enterprise space, particularly in this macro environment. Turning to ARR, we grew our total annual recurring revenue, or ARR, to $123 million as of September 30, reflecting a 14% increase compared to the same period in 2022. Organic ARR, as we defined it, was $116 million as of quarter-end, representing a 7% growth rate when compared to the ARR in Q3 of last year on a pro forma basis. While our ARR continues to trend upward, it is slightly behind the pace we expected in Q3. This is largely due to budget tightening and longer sales cycles as we shift towards larger enterprise customers in the midst of the current macro environment. A few of our ancillary products are underperforming relative to expectations. That said, the pipeline rate remains robust, and the demand for our core policy, regulatory, geopolitical, macroeconomic, security, and operational risk products continues to be strong. Large enterprises continue to be our fastest growing customer group on an organic basis. Looking at gross profit, we continue to enjoy strong margins. Our Q3 gross profit was $23.6 million, representing 69% margins. Our third-quarter non-GAAP adjusted gross profit was $28.4 million, representing an 83% adjusted gross profit margin after adjusting for amortization. Our adjusted gross profit margins remain consistently high in the 80% range quarter after quarter. In Q3, total operating expenses decreased by approximately $2 million year-over-year, excluding non-cash stock-based compensation expenses, costs of revenue amortization, and transaction costs. Sequentially from last quarter, total operating expenses declined by about $3.2 million, excluding non-cash stock-based compensation expenses and other non-cash expenses. This, combined with our Q4 cost actions, means we will realize almost $20 million of annualized operating expense cost savings this year. We are delivering on our cost management programs while continuing to invest in innovation and growth for the future. Within operating expenses, sales and marketing costs were $11.2 million for the quarter, a decrease of $600,000 year-over-year even after acquisitions and a decrease of $450,000 from last quarter due to our sales realignment program. R&D expenses were $4.5 million, a $1 million decrease from last year and essentially flat from last quarter. Editorial costs were approximately $4.5 million, which is a slight increase year-over-year driven by acquisitions but slightly decreased from last quarter. G&A expenses for the quarter were $14.4 million, excluding non-cash stock-based compensation and other public company expenses. G&A was $9.5 million for the quarter, reflecting a decrease of about $400,000 year-over-year and a decrease of almost $1 million sequentially from last quarter, reflecting the favorable impact of our ongoing expense management program. The operating loss for Q3 was $13.5 million in total, which includes $6.2 million of stock-based compensation. Our total interest expense was $8 million; of this, cash interest expense was approximately $5.4 million, which is a good proxy for our quarterly cash interest expense going forward, depending on rates. You will also note that our weighted average shares outstanding for Q3 2023 decreased by about 5.3 million shares from the last quarter, and it's now 129 million shares. This is related to our previously disclosed exchange agreement with GPO pre-listing noteholder. A GAAP net loss for Q3 was $14.5 million. As we forecasted, adjusted EBITDA was a positive $700,000 this quarter, marking our first quarter of profitability on an adjusted EBITDA basis, one quarter ahead of our initial guidance. We are delighted to achieve this important milestone for the company, reflecting our diligent cost management and solid top-line growth. It is important to note that in Q3, we delivered 160% conversion of incremental revenue to adjusted EBITDA. This reflects the power of our business model. Despite the challenging macro environment, we are driving strong incremental revenue through new logo acquisition, cross-sell, and upsell without adding incremental costs. This operating leverage is a strong indicator of what to expect as we move this company from adjusted EBITDA positive to a free cash flow generating growth company over time. Our balance sheet remains solid, with approximately $24 million of cash, cash equivalents, and short-term investments as of September 30. We expect to increase our cash position in Q1 of 2024 through continued compounding increases to prepaid ARR and seasonally strong collections. Additionally, we filed a shelf registration for a three-year $100 million registration that simply gives us flexibility and options regarding our capital structure. This is the right time to put this shelf in place; it is a common practice, one year after public listing. As we committed, FiscalNote achieved positive adjusted EBITDA 12 months after our listing date and a quarter ahead of schedule without raising additional capital. Now that we have achieved positive adjusted EBITDA, our operations are self-sustaining. We are now actively looking at opportunities to strengthen our balance sheet to further accelerate organic and inorganic growth as we turn our focus to re-accelerating growth. We will have the capital structure and flexibility to invest strategically and drive our business to the next phase of growth. Now, let me comment on our guidance and how we are positioned for profitable growth next year and beyond. For Q4, we expect revenue of $34 million to $35 million and positive adjusted EBITDA of approximately $2.5 million. The swing from a $7 million adjusted EBITDA loss in Q1 to a $2.5 million adjusted EBITDA profit in Q4 is remarkable, particularly in light of the more challenging macro environment. For the full year, we expect GAAP revenue of $132 million to $133 million. This reduction from our prior guidance is primarily driven by lower non-subscription one-time revenue. We expect run-rate revenue of $139 million to $141 million. As Tim mentioned, we're making many changes this year to position the company for greater growth. We've realigned our salesforce, adapted our product strategy, sunset unprofitable products, and reduced our cost structure. At the same time, we've allocated capital to areas of the business with the strongest upside potential. As a result, we are well-positioned as we exit the year. Our enterprise sales team is continuing to execute well against strong demand, particularly for our regulatory and policy data. Our leadership in AI is broadening our market with new partnerships and enabling us to introduce breakthrough innovations to market, including Risk Connector, FiscalNoteGPT, and now our FiscalNote Co-Pilot program. We have reached the inflection point of adjusted EBITDA profitability and paved the way for free cash flow over time. With strong operating leverage, we are positioned to drive compounding recurring revenue growth. All of this positions us for ongoing revenue and adjusted EBITDA growth in 2024 and beyond. With that, I will now open it up to questions.

The first question comes from Matt Van Vliet with BTIG.

Yes, good morning. Thanks for taking the question. I guess first on the sales opportunity, not just in the fourth quarter, but maybe as we look out into 2024. And I guess sort of two factors there: One, what's the sales realignment doing in terms of driving more upsell and cross-sell? Anything from an actual process standpoint that you've implemented? And then as we think about the maturity of that sales team, especially at the larger enterprise accounts, where do we stand in terms of sort of reps being fully ramped? Or what's the mix of fully ramped? And then secondarily on that, where are you seeing the biggest impacts from the macro in terms of feedback from customers? And how is that impacting deal flow, or maybe deal sizes?

Hey, Matt, this is Josh Resnick, I can address that. So in terms of upsell and cross-sell opportunities, part of what we've been doing with the sales realignment has been adjusting the staffing responsibilities, quota setting, commission plans, and such to align around upsell and cross-sell. We have established a team that is focused specifically on upsell and cross-sell because we do see significant opportunity there, especially when it comes to large enterprise clients. The team has undergone significant restructuring over the course of the year, viewing this as an optimization of our approach to go-to-market, both in terms of how we structure the teams, as well as the effectiveness, efficiency, and speed in ramping new talent. As we bring talent on board, we are continuing to build a robust pipeline across the board. In terms of the macro impact, we are still seeing strong demand for the products, and we have confidence in our pipelines, including in regards to some of the new products we launched, such as Risk Connector. The impact we see is really on sales cycles—the time to close those deals—as prospects experience budget pressure internally.

Okay, very helpful. And can you just remind us, as we look at the guidance, I think you mentioned that the lower one-time revenue is certainly impacting some products winding down or being sunsetting of underperforming products. But can you help us in terms of what impact that's having on the subscription line limiting the growth there that maybe we were previously expecting? How does that balance with the success of the better products, especially around the regulatory and policy data? Thanks.

Sure, Matt. As you noted, lower non-subscription, so one-time revenue, has indeed played a large role in what we're seeing. The second half is typically strong for one-time revenue, but it hasn't materialized this year largely due to budget uncertainty impacting the macro environment. On the ARR subscription side, we have seen slower pipeline conversion, like I was saying, especially as we move to larger enterprise deals where the sales cycle is naturally longer.

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

Great, thanks very much. Good morning. Yes, congrats on the positive EBITDA and the sequential change was impressive there; gross margin that seems to be at a record level and was also up sequentially. Can you sort of describe the impacts there? Was this kind of de-emphasizing some of the lower-value products? Is this sustainable? A little more color on gross margin would be great.

Mike, I think we will continue to see the gross margins remain consistent. We saw some benefits from some credits this quarter that I don't think will be repeating quarter-over-quarter. In terms of thinking about going forward, an 80% adjusted gross margin number is probably the right way to think about it.

Got it. Great! And then on the federal government vertical, have you seen any nuances there that were unexpected?

In terms of revenue?

Bookings primarily.

Okay. We went through a major cycle. Josh, you might want to handle that. But we've done contingency planning around it as we think about guidance for the upcoming quarter. But yes, go ahead.

Sorry. Yes, Mike, this is Josh. I would say it largely continues to be steady. The federal government tends to be a good steady revenue driver for us. We've seen some impact from budget pressures in the federal government, which is not surprising, given the atmosphere on Capitol Hill, but it has still remained largely steady.

Okay. And then the comment about this is the opportunity to kind of re-accelerate growth; is the implication that you would try to maintain current EBITDA margins while you re-accelerate growth, or how do you think about balancing those two?

Mike, we will continue to drive the margin. We're not giving any guidance with regards to 2024 at this time, but our operating plan will continue to push the company toward an industry-normal and above operating and EBITDA margin over time.

Your next question comes from the line of Zach Cummins with B. Riley.

Yes. Thanks. Good morning. And also congrats on the inflection to positive adjusted EBITDA in the quarter. In terms of, I know you're not providing formal 2024 guidance, but given the updated run-rate revenue outlook, is that sort of a good baseline to start from when we think about setting expectations for 2024?

Thanks for the question, Zach. Yes, that's why we give the run-rate guidance; I think it's a good way to start your modeling for the beginning of the year, and then look at any updates we give further into the year as we see how we're gaining traction or other events that would drive the number north of that level.

Got it. And in terms of the cash balance, I mean, Jon, can you give an update on is there any one-time items impacting overall cash burn in this quarter? And any update you can give on expectations for cash burn in Q4?

Our interest expense and CapEx tend to be around $7 million per quarter. That's how we think about it; beyond the adjusted EBITDA, we consider those aspects. The fourth quarter tends to be the lowest point of our year in terms of cash; we're not giving specific guidance around what we think the year-end cash balance will be. We begin to see strong cash collections going into the first quarter of each year. We see that we filed a shelf registration; this is a three-year, $100 million registration that simply provides us flexibility and options in our capital structure. We model it and plan around it, that the actions we've taken have all been done in mind of cash requirements and maintaining the liquidity necessary to keep the business where it needs to be.

Got it. And final question is really around, I believe you're expecting a bounce back in the cash balance in Q1 of next year. Is that assuming that you're going to start consistently generating positive cash flow from Q1 and beyond next year? Or is it more about the strong collections at the start of the year, and maybe it will take a little more time to achieve consistent free cash flow generation?

So there is a seasonality to our business, Zach, where we generate significant positive cash flow in the first quarter because of the amount of sales activity that takes place in the fourth quarter and the billing and collection cycle from that. From an income statement standpoint, we will be moving toward free cash flow from EBITDA standpoint concerning our fixed charges, but haven't given guidance as to when we will cross over that. However, it's certainly a focus as we move forward.

Your next question comes from the line of Rudy Kessinger with D.A. Davidson.

Hey guys, thanks for taking my questions. So the trend the last few quarters has been revenue coming in below the midpoint of guidance and the forward revenue outlook being lowered. And Jon, I know last quarter, you said you guys were assuming similar close rates in the second half of the year as you've seen in prior years. And so with this lowered revenue outlook, could you comment specifically on your assumptions for Q4, as it relates to close rates, renewals, expansions, etc., relative to past years?

Hey, Rudy. This is Josh. I can tell you, and I'll reiterate that the biggest impact came from lower non-subscription revenue, where typically we would have expected better results seasonally in the second half, which did not materialize due to budget uncertainty affecting several of our underperforming products. On the ARR side, it's been slower pipeline conversion than we typically expect. As we shift to larger enterprise deals, we are also seeing longer sales cycles, which is completely fine, but this was indeed impacted largely by the macro environment and conditions worsening in the latter half of the year.

Sure. And Rudy, regarding guidance for the remainder of the year, we've factored in the close rates that Josh mentioned in the slower pacing into that guidance. That's why we adjusted the revenue figure down for the quarter. We've reviewed the pipeline within the context of the conversion rates that we're actually seeing, and that's why we made the adjustments.

Your next question comes from the line of Mike Albanese with E.F. Hutton.

Yes, good morning, guys. Thanks for taking my question. And nice quarter given some of the macro headwinds and lengthening of the sales cycle. I just want to get an update on the AI front and how you're utilizing technology. Are there any signs of improving efficiencies across the organization? Specifically, where are you pulling out annual synergies? Thanks.

Yes, thanks for the question. A couple of different things: One, the progression of the products we have in the market, namely Risk Connector and some of the traction we’re seeing there. That was a wholly built in-house product that we went to market with to target the supply chain market and similar areas. In the second half of my earnings call, I discussed some new initiatives we’re launching in the market. I would say that the generative AI market has begun to coalesce around a more user-centric product and go-to-market model than what we've traditionally followed. If you look at very recent product lines from Microsoft or from growth-oriented startups, you'll find that many product lines are coalescing around a per-user pricing model of $50 to $200 a month per user, targeting specific generative AI capabilities for those customer sets. Our intention is to implement a similar Co-Pilot strategy for the legal and regulatory space within the next few weeks. The idea would be to take data embedded within generative AI capabilities, and assist legal professionals in drafting documents, creating legislation, and effectively being charged in a similar price range. The goal is to go out and allow users to easily subscribe via credit card, which facilitates quicker go-to-market strategies. In summary, we are seeing solid traction overall and will continue to monitor as we try to accelerate growth.

There are no further questions at this time. I will turn the call back to CEO, Tim Hwang for closing remarks.

Yes, I appreciate everybody taking the call here and definitely looking forward to another great quarter. Thank you, everybody.

This concludes today's conference call. We thank you for joining. You may now disconnect your lines.