Q3 2023 FiscalNote Holdings Inc Earnings Call
Good morning, My name is different I will be your conference operator.
At this time I would like to welcome everyone to the physical note third quarter 2020 financials.
All lines have been placed on mute to prevent any.
After the Speakers' remarks, there will be a question and answer session.
You'd like to ask a question. During this time simply press Star then the number one onwards.
To withdraw your question Press Star one again.
Ill now turn the conference over to Sara Buda, Vice President Investor Relations. Please go ahead.
Hi, everybody welcome to the fiscal note 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 rather are subject to a variety of risks and uncertainties, our actual results could differ materially from expectations.
Afflicted and 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 on our website as well as the risks and other important factors discussed in today's earnings release.
Additionally, non-GAAP financial measures and other Kpis will be discussed on this conference call. Please refer to the tables in our earnings release and the Investor Relations portion of our website for a reconciliation of these measures to their most comparable GAAP financial measure with that I'd like to turn the call over to fiscal notes Chairman C.
E O and co founder Ken Wong.
Thank you Sarah 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.
A year ago, we committed to adjusted EBITDA profitability and that is exactly what we delivered in fact, we've delivered that's one quarter earlier than we had originally forecast you've been a bit more challenging macroeconomic environment.
If you look at where we were when we began this year, we've essentially 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 and adjusted EBITDA as 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 advancements to accelerate our decade long leadership in AI aligned our sales teams on the highest growth customers and refined our product portfolio now.
Now as we end 2023, it is time to build on this foundation and turn our focus towards re accelerating growth I'll get into the details of that growth strategy shortly.
First let me remind you of our mission here at fiscal note and the value we bring to more than 5000 customers every day.
At fiscal note, we're on a mission to help our customers make sense of the complicated a coffee changing world. We live in delivering a proprietary AI enabled platform that aggregates and organizes regulatory political and macroeconomic information and analyze the impact on the organization.
Changes in policies regulations and laws impacted decision, making up almost every organization around the world.
Using our proprietary AI capabilities, we aggregate synthesize and analyze math about the legislative policy regulatory and macroeconomic data and information around the world and provide actionable intelligence customers in a subscription model.
As such we 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 and the U S Congress, the federal reserve and public sector organizations in Europe, and Asia, the major corporate customers, including more than half of Fortune 100.
Beyond large enterprises, what serves a wide and diverse range of business customers ranging from health care and pharma financial services technology energy food and beverage transportation automotive industries and beyond.
These customers rely on physical out everyday discover process and navigate the impact government policy, making other organization and more importantly to take actions, which achieve their business objectives and minimize political and economic risks.
This forms the basis of our durable and long term growth.
Our customers analyzed over $6 four trillion in government spending and tracking the over 500000 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 risk and powerful analytics and research.
To understand the mission critical updates with every global conflict every time, the United States and China get into stat over semiconductors, and every other new tariff sanction regulation and geopolitical disputes with data and information are more relevant than ever to help companies organization navigate through an increasingly challenging complex world.
This is a $37 billion market opportunity the company spend every year trying to obtain this critical information and data.
We have become an increasingly critical and ubiquitous Bloomberg terminal of political legislative regulatory information at the local state federal and global levels.
The same way that other information companies, such as S&P Global IHS Markit Factset Morningstar Costar in Atlanta have innovated in their respective information fields.
Continues to deliver mission critical information that has a direct impact on our customers' operations and created an entirely new category within the data and 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 makes sense of an exploding pace and volume of dynamic unstructured regulatory political and legal information around the world and the software workflow tools help our customers respond.
This forms the basis of our market leadership position as the <unk>.
<unk> of 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 uncertainty, we believe only physical can 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.
These margins are hallmark of physical hub and stemmed 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 $700000 in line with the guidance we provided on the last call.
Our cash and short term investments beyond a quarter with $24 million.
Turning to management Kpis, we delivered run rate revenue of $138 million or <unk> was 123 million growth of 14% year on year total 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 NRO rates continued to be well above company average.
Now, let's turn to the nuts and bolts of the business first we will review the things that are going well second we will look at the things we need to improve on and third we will discuss the pathway for the company moving forward to accelerate growth that we've achieved profitability.
First on the things that are going well.
We are now profitable on an adjusted EBITDA basis for.
For the last year considerable management time and attention has been placed in this goal.
This delivered a tremendous inflection point of delivering positive adjusted EBITDA for the first time in the company's history and one quarter earlier than initially forecast we.
We enabled strong operating leverage driving a 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 spend and sunsetting underperforming unprofitable products. We made major changes in our sales team to focus on large enterprises with larger ACB.
This has proven to be the right strategy with impressive outcomes.
By shifting our R&D spend 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 physical at GPT, which are both starting to gain traction in the market.
By aligning our sales team and reallocating resources to focus on large enterprise accounts with larger <unk>. We have turned large enterprise into our largest SaaS growing customer group with NR rate well above company average trending well above 105% on an LTM basis.
And there is more upside here as we introduce new enterprise products with higher Ltvs and continue to upsell and cross sell.
By modifying our go to market model and reallocating sales and marketing spend we are starting to drive growth in the areas of the business with the strongest upside potential.
More importantly by taking cost actions across the organization, we have achieved adjusted EBITDA profitability as that initial plan and position the business for very strong conversion of incremental revenue to adjusted EBITDA profit and.
And ultimately we have created a durable 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 is poised for rapid growth.
With global operations, ranging from Washington, D C and London to Seoul in 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.
Estimates of the hard work and dedication of our team and the unparalleled value we deliver to our 5000 customers every day.
So where do you see areas of improvement for the business that candidly we are watching two data points very closely within the business first while we have seen great continued growth in our subscription business. We have seen some challenges in our one time das tissue revenue, which is typically very strong second half of the year with.
With a challenging macro and some under performance in some few knock wood products. This one time non subscription revenue did it deliver on pace with our traditional seasonality.
Second we had some slower than expected pipeline conversions as you shift towards 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 bigger couse launch new products and features and structure to go to market teams to go. After these deals under the current macroeconomic environment. These steels, receiving more scrutiny and company P&l's.
So what is the Companys plan to reignite growth and profitability now that we've achieved the inflection point of adjusted EBITDA profitability.
It is now time for us to shift our management time focus and attention to allocate our time and resources and capital to re accelerating growth.
This is the singular focus of the operating team to drive sustained growth within the organization as we have done for the last 10 years.
Fundamental to this growth re acceleration as the refined product strategy.
This is where we drive incremental upside to the durable based revenue that 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 continued to be the strongest offerings in our portfolio with robust demand organizations are facing significant increasing regulatory complexity and it is spreading globally, which creates uncertainty for all organizations.
Topline and Bottomline and paper companies that operate globally as well.
We spent the last decade applying proprietary expertise to structure normalized analyzed and digitize vast amounts of regulatory legal macroeconomic and geopolitical information.
And to embed workflows to make data useful and actuals for our customers today.
Today, thousands of organizations, including those in the public sector and private sector Reliance's, Commodes regulatory and data Pos solutions as.
As such we will continue to invest and build upon the success of its core products with new product enhancements, new datasets and new AI workflows that reinforce our superior competitive position.
And bring unparalleled value to our customers.
We believe there is ample opportunity to continue our land and expand strategy with our largest customers as we continue to up sell and cross sell legal and regulatory datasets.
Second we will pursue adjacency 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 reputation orders.
Risk connector brings the power of our proprietary data and AI capabilities to map relationships and identify risks within the organization supply chain as well as organizations customers investors partners and any other vectors through which risks materialize.
This empowers larger renovations of private and public sectors to anticipate understand quantify and track risks emanating from their operation and a full web of relationships in a way that current solution is not.
Only a few weeks after public launch we already have our first anchor customer and several other active proposals in market with large enterprises.
We're delighted with the early momentum with new products, which exemplifies our AI leadership, and our unrelenting commitment to innovation that delivers customer value.
Risk connectors, just one example of a product adjacency, we have additional products in development that will enable us to accelerate growth through adjacencies such as this.
We also continue to pursue geographic adjacencies as well this year, we invested in our Europe expansion, both organically and through acquisition, which allows us to be able to bring new data sets 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 placing a substantial shift in our new product strategy to focus on AI co pilot agents. Our first new product initiatives is our physical AI co pilot program through which we are developing a series of AI enabled applications that provide intelligent assistance for policy and risk management specials.
The co pilot program Leverages, our decade long investment in AI ml, and MLP proprietary defensive reasoning and data aggregation tools as well as the turns about the proprietary and public Virtualized datasets and comprehensive information of fiscal in class provides lightweight applications in very specific use cases.
The Golar fiscal is the launch of constellation of AI agent that include quick application catered to our individual customer centers that automate the day to day work of creating legislation drafting regulatory legal analysis doing advocacy outreach and conducting constituent communication and regulatory responses in.
In doing so co pilot will reduce countless hours that our customer spent drafting legislation responding to legislation communicating constituents within other tax deliver.
<unk> delivered at lightweight self serve apps. These co pilot builds in our fiscal GPT generative AI platform, we announced early this year and enable new go to market models with an array of physical products that are easy to sell easily deliver and easy to scale across users.
The value of physical customers as clear as we essentially enable both existing and prospective customers to quickly and easily leverage our AI powered solutions to get their jobs done faster with a high degree of confidence.
The context for this co pilot programs evident.
Despite major advances in AI and the use of large language models. The technology industry. There is a crucial need for organizations to specifically address the unique complexity that exists in the legal and regulatory world.
With our expertise in data ingestion collection cleansing and curation and of course, our extensive archive of legal and regulatory data sets around the world. It is logical for fiscal <unk> to fill this void with physical at GPT and now our new AI co pilot program.
Of course discount copilot complements and builds upon our integration with large language model providers like opening at Google.
With our new co pilot focused Ci strategy will develop new go to market model line of expectations for per user pricing.
We expect that these products will be sold on a per user basis that allows users to be able to purchase these products individually with the swipe of a credit card's substantially eliminating friction in our go to market process, enabling mass adoption of our generative AI tools and ensuring faster revenue generation.
We expect our co pilot strategies to begin rolling out over the next several weeks and months as we embark upon building a constellation of AI agents on top of our data.
Our co pilot program marks yet another development the physical it's ongoing leadership as we develop and bring to market AI enabled solutions, specifically aimed at the legal and regulatory sector. You can expect to hear more from us in the coming weeks about physical co pilot and our other new product developments that over time provide incremental growth path to complement our proven durable base of recurring.
Revenue solutions.
In summary, there've been a lot of changes in 2023, as we dedicated our time energy and resource to achieving profitability youre not pivoting our focus to new avenues for accelerating growth in 2024 and beyond with a refined three pronged product strategy and go to market strategy and will enable us to build on our core products with the highest growth potential pursue natural adjacencies to offerings 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 compounded growth company that provides unique value to the world's most important decision makers and scaling this business to 200 million $300 million $500 million and $1 billion of recurring revenue to be honest.
Separately you all saw the disclosure that I have 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 growth.
The company's strategic options in the best interest of shareholders, while I can't comment further I will reiterate what I've said on our past calls we have approximately $140 million run rate revenue, our proven durable compounding recurring revenue model with more than 5000 customers, 80% adjusted gross margin and now <unk> adjusted.
Adjusted EBITDA profitability.
Business has never been in a stronger position in our stock price does not reflect the strength of these fundamentals we continue to trade well below other sector specific information services leaders.
Ultimately, we will always do what is in the best interest of shareholders to achieve a valuation that recognizes and reflects the value of our fundamentals and our future growth opportunity as we build a long term large scale market leader in adjuvant information services, regardless of the outcome of the entire organization. We remain committed to growing our business that is delivering value for the world's most important decision makers with trust fits going to discover.
<unk> process and navigate the impact of policymaking on organization and more importantly to take actions, which achieve their business objectives and minimized political and economic risks now let me turn it over to John 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 and our commitment to ongoing adjusted EBITDA growth moving forward.
Let me start with the quarter third quarter, GAAP revenue was $34 million, mark and 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 year from a year ago, and 7% growth on an organic basis.
Excluding the noncash deferred revenue adjustment 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.
Margin, 14% year over year growth on an organic basis run rate revenue was $129 million, reflecting 7% growth on a pro forma basis as defined in our press release.
Our net revenue retention for the quarter was approximately a 100% sequential quarter increase of 200 basis points from 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.
You know we have three primary customer groups, we serve public sector not for profit associations and enterprises as we said enterprise, our largest customer group and large enterprise and strategic accounts represent the fastest growing and highest at all of our customers.
And that has been the impetus for some of the changes we've made to our sales organization.
To capitalize on this underlying demand and to extend our growth and large enterprises. This quarter reinforced this is the right strategy.
Our rates among our large enterprise corporate customers continues to trend above company average.
Demand for our regulatory and policy data continues to be strong, particularly among large enterprises.
Some of the recent changes we've made from product strategy to sales allocation, we see opportunities for in all of our rates in this large enterprise group to expand further.
Many companies, we tend to see a bit more churn in the small enterprise space, particularly in this macro.
Turning to error, we grew our total annual recurring revenue or <unk>.
<unk> to $123 million as of September 30, an increase of 14% compared to the same period in 2022 organic IRR is as we define it was $116 million as of quarter end. This represents a 7% growth rate when compared to the <unk> and <unk>.
Q3 of last year on a pro forma basis.
While our air continues to trend up it is slightly behind the pace. We expected in Q3. This is largely due to budgetary even longer sales cycle as we shift towards larger enterprise customers in the midst of the current macro environment.
And a few of our ancillary products are underperforming expectations that said the pipeline rate remains robust.
The demand for our core policy regulatory geopolitical macroeconomic security and operational risk <unk> continues to be strong. These products are crucial to help large enterprise customers manage global complexity and operational risks.
Large enterprise continues 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 a 69% margins our third quarter non-GAAP adjusted gross profit was $28 $4 million, representing 83% adjusted gross profit margin after adjusting for amortization.
Our adjusted gross profit margins remained consistently high in the 80% range quarter after quarter.
Q3, total operating expenses decreased by approximately $2 million year over year, excluding noncash stock based compensation expenses cost of revenue amortization.
Transaction costs.
Sequentially from last quarter total operating expenses declined by about $3 $2 million, excluding noncash stock based comp and other noncash expenses.
This combined with our Q4 cost action means we will realize almost $20 million of annualized opex cost savings this year.
We are delivering on the cost management programs, while continuing to invest in innovation and growth for the future.
Within Opex sales and marketing costs were $11 $2 million for the quarter, a decrease of $600000 year over year, even after acquisitions and a decrease of $450000 last quarter with our sales realignment program.
R&D expenses were $4 5 billion.
But $1 million a decrease from last year and essentially flat from last quarter.
<unk> costs were approximately $445 million.
A slight increase year over year, driven by acquisitions and a slight decrease from last quarter.
<unk> expenses for the quarter was $14 $4 million.
Excluding non cash stock based compensation and other public company expenses G&A was $9 5 million for the quarter.
This is a decrease of about $400000 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 this includes $6 $2 million of stock based compensation or.
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'll also note that our weighted average shares outstanding for Q3 2023 decreased by about $5 3 million shares for the <unk>.
Last quarter. It is now 129 million shares.
This is related to our previous disclosed exchange agreement with GPO Capri lifts the note holder.
The GAAP net loss for Q3 was $14 5 million and as we forecasted adjusted EBITDA was a positive $700000 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, which reflects our diligent cost management.
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 we're driving strong incremental revenue through new logo acquisition cross sell and up sell without adding incremental cost. 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.
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 in 2024 through continued compounded increases to prepay their armor and seasonally strong collections.
You'll see that we did file a shelf registration.
The three year $100 million registration that simply gives us flexibility and optionality in our capital structure. This is the right time to put a shelter in place. It is as a common practice one year after public listed as.
As we committed physical noted achieve positive adjusted EBITDA 12 months after our listing date and a quarter ahead of schedule and without raising additional capital now that have achieved positive adjusted EBITDA our operations are self sustaining.
Actively looking at opportunities to strengthen our balance sheet resources that will 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 to 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% to $35 million, we expect 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.
For the full year, we expect GAAP revenue of $132 million to $133 million. This is a reduction from our prior guidance with the majority of the impact driven by lower non subscription onetime revenue.
We expect run rate revenue of $139 million to $141 million.
As Tim mentioned, we've been making a lot of changes this year to position the company for greater growth. We've realigned our sales force, we've adapted our product strategy and sunset unprofitable products and we've reduced our cost structure.
At the same time, we reallocated 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 are continuing to execute well against strong demand, particularly for our regulatory and policy data.
Our leadership is broadening our market with new partnerships and enabling us to bring breakthrough innovations to market, including risk connector fiscal note GPT and now our fiscal note co pilot program.
We have reached the inflection point of adjusted EBITDA profitability and pave the way for free cash flow and return.
With strong operating leverage we are well 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 ill now turn it up to questions operator.
At this time I would like to remind everyone. In order. Okay question simply press Star then the number one on your telephone keypad.
The first question is from the line of Matt Van Vliet with BTG.
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.
I guess sort of two factors there one what's the sales realignment doing in terms of driving.
More upsell cross sell anything from an actual process standpoint that you've put in and then.
As we think about sort of the maturity of the sales team, especially at the larger enterprise accounts, where are we in terms of sort of reps fully ramped or what's 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 I guess either.
Deal flow or maybe deal sizes.
Hey, Matt This is John.
Josh Redneck I can address that so in terms of upsell cross sell opportunities part of what we've been doing with the sales realignment has been.
Adjusting.
Staffing responsibilities.
Quota setting commission plans and such to align around.
Selling cross sell.
And.
Have in fact established.
Team that is focused specifically on upsell and cross sell because we do see significant opportunity up there.
Especially when it comes to large enterprise clients.
Team has gone through significant restructuring over the course of the year, we've been viewing that as an optimization of our approach to go to market. Both in terms of how restructuring of the teams.
But also in terms of.
Overall, the quality of the talent that we have in those teams and.
As well as.
Our effectiveness efficiency and speed in ramping new talent as we bring talent on board and continuing to build our pipeline of talent across the board that we can use to continue as we continue our growth down the road.
And in terms of the macro impact I would say we are still seeing strong demand for the products. We have a lot of confidence in our pipelines, including in regards to some of the new products that we've launched such risks connector, where we tend to see an impact really is on sales cycles and really the time to bring those home as.
As prospects see budget pressure internally.
Okay very helpful. And then can you just remind us as we look at the guidance.
I think I think you mentioned that on the one time, that's that's certainly being impacted by some of the products sunsetting and winding down of the underperforming products, but can you help us in terms of what the impact is on the subscription line limiting the growth there than maybe we were previously expecting.
And then how that.
May be balanced with the success of the better products, especially around.
The regulatory and policy data thanks.
Sure Matt So yes as you noted.
Lower non subscription some onetime revenue.
Certainly played a large role in what we're seeing.
Second half is typically strong for onetime revenue in that.
That hasnt materialized this year due to largely due to budget uncertainty related to the macro.
On.
Our subscription side, we have seen some slower pipeline conversion like I was saying and especially as we move to larger enterprise deals where the sales cycle naturally longer again, the macro is going to have an impact there.
Okay, great. Thank you.
Your next question comes from the line of Mike Latimore with Northland Capital markets. Your line is open.
Alright, thanks, very much good morning.
Yes, congrats on the positive EBITDA.
<unk> was pretty impressive there.
Gross margin that seems to be at a run.
Third level and was also up sequentially can you just sort of describe the impacts there was this kind of.
Sizing some of the lower value products.
Sustainable Schloemer color on gross margin I would be great.
Okay.
Mike I think.
We're going to do.
Continue to see the gross margin say pretty consistent we saw some benefits from credit.
Credit Suisse. This quarter that I don't think it will be.
Continue to repeat quarter over quarter. So in terms of thinking about it going forward at 80%.
Adjusted gross margin numbers, probably the right way to think about it.
Got it okay.
Great and then on the.
<unk>.
Just kind of some of the.
Vertical effects here.
Federal government vertical have you seen any kind of nuances there.
Our.
Unexpected.
In terms of in terms of revenue.
Bookings primarily.
We're getting customer behavior.
So as you might want to handle that but we've done we've done contingency planning around it as we think about guidance for the upcoming quarter.
Sure Yes go.
Go ahead, sorry, yes, Mike This is Josh I would say, it's largely continues to be steady federal government.
It tends to be a good steady revenue driver for us.
We've seen some impact from <unk>.
Budget pressures in the federal government not surprising given the atmosphere on Capitol Hill, but still largely remains steady.
Got it okay.
The comment about this as the opportunity to kind of Reaccelerate growth.
Is the implication there that you would try to maintain current EBITDA margins, while urea reaccelerate 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, we will continue to push the company towards a more normal industry normative operating and EBITDA margin over time.
Got it okay, great. Thanks very much.
Your next question comes from the line of Zach Cummins with B Riley Your line is open.
Yes, thanks, good morning.
Congrats on the inflection to positive adjusted EBITDA in the quarter.
In terms of I know, you're not giving formal 2020 for guidance, but just given the updated run rate revenue outlook.
That sort of a good baseline to start from once we think about setting expectations for 2024.
Thanks for the question Zack Yes, that's why we give you the run rate guidance I think it's a good way to kind of start your modeling for the beginning of the year and then kind of looking at any update.
The update we gave further years, we see how how we're gaining traction or other events that would drive the member narrative.
That level.
Got it.
In terms of the cash balance.
John can you give an update on is there any one time items impacting overall cash burn in this quarter and any sort of update you can give on on.
Our expectations for cash burn in Q4.
So.
Our.
Interest expense and Capex tend to be around $7 million per quarter, I think thats kind of when we think about.
Beyond beyond the adjusted EBITDA, how to think about that.
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 and then we begin to see very strong cash collection going into the first quarter of each year. So we expect to see the balance kind of building back up as we move into the first quarter, but we model a model it.
We plan around it the actions we've taken to date have all been done in light of.
Cash requirements and maintaining the liquidity, we need to keep the business where it needs to be.
Got it and final question is really around I believe youre expecting a bounce back in the cash balance in Q1 of next year.
Is that assuming that youre going to start.
Consistently generating positive cash flow from from Q1 and beyond next year or is it more of just the strong collections I'll start there and maybe it will take a little more time to get to consistent free cash flow generation.
So there is a seasonality to our business, 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 off of that.
From a <unk>.
Income statement standpoint, we will be moving towards free cash flow from a EBITDA standpoint relative to our fixed charges, but havent give guide given guidance as to when we cross over that.
A focus of ours as we move forward to get to that level.
Understood. Thanks for taking my questions and best of luck in Q4.
Okay.
Once again, ladies and gentlemen, if you have a question. It is star one on your telephone keypad.
Your next question comes from the line of Rudy Kissinger with D. A Davidson your line is open.
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 John I know last quarter. You said you guys were assuming similar close rates in the second half of this year as you've seen in prior years and so with this lower revenue outlook just could you comment specifically.
On your assumptions for Q4 as it relates to closed rates.
Renewals expansions et cetera relative to past years.
Okay.
Hey, 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 and we didn't see that come through.
Largely due to budget uncertainty some underperforming products.
And then on the IRR side, it's been slower pipeline conversion.
We typically see and so like I said as we move to larger enterprise deals in Tennessee longer sales cycles, which is.
Which is fine, but we saw an impact largely due to the macro in the second half and conditions worsening in the second half sure Rudy as it relates to the guidance for the remainder of the year, we've taken into consideration. The close rates suggests we've referenced in the slower pacing into that guidance and that's why we adjusted the revenue figure.
Sure.
<unk> for the quarter, we reviewed the pipeline and looked at it.
In light of our conversion rates that we're at.
Actually seen and that's why we took the adjustment that we get.
Okay and then.
I guess, what youre, saying on the Q1 cash bounce back given.
Changes in networking capital, but.
I think roughly $7 million a quarter in cash interest expense.
I guess, just what level of annualized EBITDA do you need to get to to be free cash flow breakeven to positive on an annual basis.
So our cash interest expense to be clear is a little bit over $5 million and then our capital expenditures are between one and $2 million per quarter generally and that's that's the referenced and $7 million.
You could annualize that.
Back into the number we would need to get to to be truly free cash flow positive.
On a standalone basis.
Your next question comes from the line of Mike Albani with Yes Hutton Your line is open.
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 wanted to get an update on the AI brought in how you guys are utilizing technology and really if youre seeing any green shoots.
Improving efficiencies across the organization and I guess, specifically, where you're pulling out of any synergies. Thanks.
Yes, no. Thanks, thanks for the question.
I think that a couple of different things. So the first thing that we pointed out to you today on the call as the <unk>.
Progression of some of the new products that we have in the market.
Namely risk connector and some of the traction we're seeing there.
That was completely wholly built in house product that we kind of went out to market with to go after the sort of supply chain.
Mark and the like.
In the second half of my earnings call I basically had talked about.
Some of the new initiatives that we're launching here in the market and I'll.
I guess, what I would say is that the generative AI market in general has started to coalesce around the type of product and type of go to market that.
It is somewhat different from what we've kind of gone to market with traditionally if.
If you look at very recent product line.
Microsoft or from a growth oriented startups alike.
A lot of the product lines that we're seeing are coalescing around call it per user pricing.
$50 to $200 a month per user.
And then pricing very very targeted.
AI capabilities for those customer sets and so.
Essentially what I talked about it that over the course next couple of weeks our intention is to implement a similar kind of copilot strategy for the legal regulatory space.
That should take the data that we have embedded within kind of generative AI capabilities, and then help lawyers legal professionals regulatory professionals draft document create legislation create laws, where the cases and then effectively charge similar price points several hundred dollars a month per user.
Such that people can go out there and swipe a credit card and go to market very quickly so what that effectively means that.
We have been in development with a series of these co pilot products for some time now and.
We expect that actually in a different go to market channel different from a heavy enterprise sales model, but were going to trying to go with a more product led growth.
Kind of user driven model here to drive faster revenue generation.
And it kind of really lead into a generative AI market a lot more aggressively so.
We are seeing pretty good traction here overall and I think that's something that we're going to continue to monitor.
<unk> started to grow the business.
Got it thank you.
Once again, ladies and gentlemen, if you have a question it is star one.
There are no further questions at this time I will turn the call back to CEO, Tom Wang for closing remarks.
Yes, well 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.
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