FiscalNote - Q1 2024

Executive Summary

• Q1 2024 revenue was $32.1M (+2% YoY) and adjusted EBITDA was $1.2M (4% margin), slightly exceeding prior guidance; GAAP net income was $50.6M, driven by the gain on the Board.org divestiture.
• Gross margins strengthened: GAAP gross margin rose to 77% (from 72% YoY), and adjusted gross margin to 85% (from 80% YoY), reflecting sunset products and efficiency gains.
• FY 2024 guidance was reaffirmed (revenue $123–$127M, RRR $126–$134M, adjusted EBITDA $7–$9M); Q2 2024 guidance introduced at ~$29M revenue and ~$$1M adjusted EBITDA.
• Strategic review remains active with Centerview and Skadden advising; management highlighted accelerated AI roadmap (StressLens, Global Intelligence Copilot, Copilot Creator) as key catalysts for growth and retention.

What Went Well and What Went Wrong

What Went Well

• Adjusted EBITDA positive for the third consecutive quarter ($1.2M), an $8.2M YoY improvement, evidencing cost rationalization and efficiency gains.
• Gross margin expansion (GAAP 77%, adjusted 85%) on product sunsets and operating efficiencies; CFO emphasized continued pursuit of efficiencies.
• Accelerated AI product strategy: launched StressLens and Global Intelligence Copilot; unveiled Copilot Creator Reasoning Engine and FiscalNoteGPT, with early customer uptake and retention benefits expected.
  • “Building the most powerful legal, regulatory, and geopolitical AI assistant and eventually the world’s most powerful AI lawyer”.
  • “We are well positioned to… continue launching innovative AI products… and deliver on our profitability plans”.

What Went Wrong

• KPIs declined due to Board.org divestiture: RRR fell to $122M (from $134M YoY) and ARR to $110M (from $119M YoY); NRR held at 96%.
• Non-subscription revenue declined 19% YoY (to $2.5M) from discontinuation of certain non-strategic products and services.
• Consensus estimates could not be retrieved; thus, direct beat/miss vs Wall Street is unavailable at time of writing (S&P Global data not accessible) [GetEstimates unavailable—Values retrieved from S&P Global*].

Transcript

Operator (participant)

Good morning. My name is Aaron, and I'll be your conference operator for today. At this time, I would like to welcome everyone to the FiscalNote first quarter 2024 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session, and we'll provide further information on that point. If you do want to get your name in the queue now to ask a question, you can press star followed by the number one on your telephone keypad, and if you would like to withdraw that question, you can press star followed by the number one once again. With that, we can now begin today's call. I would like to turn it over to the-

Bob Burrows (Founder)

Good morning. My name is Bob Burrows. I'm with Western Avenue Advisers, LLC, which was hired in April as an investor relations consultant to the company following Sara Buda's recent departure. I look forward to speaking to and being a resource for the company's investor stakeholders in the days, weeks, and months ahead. Thank you all for joining the call today as we discuss FiscalNote's first quarter 2024 financial results. With me on today's call with prepared comments are Tim Hwang, Chairman, CEO, and Co-founder, and Jon Slabaugh, CFO, and Chief Investment Officer. Other members of the senior management team will be available during the Q&A session that will follow these prepared comments.

Please note, a slide deck specific to the first quarter 2024 results and intended as a supplement to the earnings release, as well as the forthcoming prepared comments from management, is available on the company website. In terms of important housekeeping, it is important to mention the following. During this call, we may make certain statements related to our business that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance, but rather are subject to a variety of risks and uncertainties. Our actual results could differ materially from expectations reflected in any forward-looking statements.

For discussion of the material risks and important factors that could affect our actual results, as well as the risks and other important factors discussed in today's earnings release, please refer to our SEC filings, which are available either on our company website or the Securities and Exchange Commission's EDGAR system. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release or the accompanying slide deck for this call, both of which are available on the investor relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measures. Finally, we use key performance indicators, or KPIs, in evaluating the performance of our business. These include run rate revenue, or RRR, annual recurring revenue, or ARR, and net retention revenue.

Again, please refer to the earnings release or the accompanying slide deck for this call for definitions of these important metrics. And with that, I'd like to turn the call over to FiscalNote's Chairman, CEO, and Co-founder, Tim Hwang. Tim?

Tim Hwang (Chairman, CEO, and Co-Founder)

Thank you, Bob, for that introduction, and thank you all for joining us this morning. It's great to be with you today to discuss our first quarter 2024 results and provide an update on the state of our overall business. We'll also offer some perspective on our strength and balance sheet position and profitable growth with the recent divestiture of a non-core business, as well as elaborate on our product strategy and our commitment to driving strong return on invested capital. I always look forward to these opportunities to connect with our shareholders and share with you the exciting developments at FiscalNote. First, let me remind you of some of the core fundamentals of FiscalNote.

We're on a mission to help our customers make sense of the complicated and constantly changing world we live in by delivering a proprietary AI-enabled platform that aggregates and organizes regulatory, political, and macroeconomic information and analyze the impacts on their organizations. We are the market-leading AI platform for the regulatory, legislative, policy, and geopolitical intelligence sectors. Essentially, the Bloomberg Terminal for regulatory, legislative, and strategic risk, drawing upon a deep reservoir of technical expertise, proprietary data, and analytical tools.

Our proprietary, high quality, and authoritative data on a range of aspects include international, federal, state, and local legislation across 80,000 cities, all 50 states, and every major federal regulatory agency, as well as deep profiles of tens of thousands of policymakers, millions of legislative and regulatory bills, and purpose-built analytical tools monitoring governments around the world that have enabled FiscalNote to build a market-leading position across thousands of customers. Many of our assets, including CQ, serve essentially as the Dow Jones of legislative and policy worlds, providing deep domain expertise with proprietary data. CQ, as an example, has been providing Washington with information about congressional votes, budgets, and congressional information since 1945.

We operate in a large and growing $40 billion addressable market, driven by increasing global uncertainty, as well as operational and regulatory complexity that impacts almost every organization, from governments and nonprofit organizations to large enterprises who operate in a highly regulated global environment. We have a strong and enduring competitive mode, underpinned by our decade-long investment in data, AI, and human intelligence. Our broad AI leadership in both generative AI and domain-specific AI is supported by a deep patent portfolio and is recognized by the world's preeminent AI platforms, from OpenAI to Microsoft and Google. We are passionate about our customer success.

Thousands of organizations, ranging from government agencies and public sector organizations to major corporate customers in the Fortune 100, rely on FiscalNote every day to help interpret the impact of policies, legislation, elections, global conflicts, and macroeconomic shifts on their institutions, and more importantly, to take actions which achieve their business objectives and minimize political, operational, and economic risk. This forms the basis of our durable and long-term growth. We enjoy recurring, compounding revenue streams with customers who renew their subscriptions year after year and have a proven business model of successful upsell and cross-sell by offering incremental datasets, products, and capabilities that enhance and expand our customer value. Our net dollar retention has stayed in the high 90s on a consistent basis, and our revenue stream is approximately 90% recurring in nature, which provides for a high degree of visibility.

We have strong financial momentum supported by healthy compounding top-line growth, ongoing adjusted EBITDA profitability, and a solid cash position. Our management team has a strong record of innovation and product success that have enabled us to push the bounds of the market and be innovative on behalf of our customers. We have relentlessly focused on capital allocation strategies that support our goal to build a durable, profitable, compounding growth company that provides unique value to the world's most important decision makers. As we scale the business, we expect to deliver long-term free cash flow margins in line with other information services leaders at scale.

Just as S&P Global, IHS Markit, FactSet, Morningstar, CoStar, and Avalara have innovated in their respective information fields, FiscalNote is forging a new path for global political, legislative, and regulatory policy and market intelligence by delivering mission-critical information that has a direct impact on our customers' operations. With our established AI pedigree and our vast array of validated, trusted data, we are in a unique position to lead what is an entirely new category within the information service industry. We have a clear competitive advantage to deliver on this outcome. With that as a backdrop, let me turn to some of our exciting developments that are happening here at FiscalNote.

We kicked off 2024 with a solid start, delivering total revenues of $32 million, which was slightly above our previously provided guidance, and adjusted EBITDA of just over $1 million, marking an important improvement in profitability versus the prior year and in line with previous guidance. This also marks our third straight quarter of adjusted EBITDA profitability as a company. These results reflect the hard work and dedication of the entire FiscalNote team as we continue to execute on our mission to deliver critical insights to the world's most important decision makers. Whether it's a Fortune 100 company navigating complex regulatory landscapes or government agencies seeking to understand the impact of policy changes, FiscalNote is there, providing the data, tools, and expertise they need to make informed decisions.

As we entered this year, we did so as a leaner, more focused organization with a relentless commitment to leveraging our decade-long investment in artificial intelligence. We have launched new products and are optimizing our go-to-market approaches to maximize the impact of our AI technologies married with our product strategy. This is providing enormous benefit to our customers through enhanced access to our sizable, unique, and curated datasets. And while the rest of the industry is now catching up to the power of AI, it's been at the core of what we do at FiscalNote since our founding. To our benefit, we also believe the current generation of AI tools will help us unlock faster, easier, and more scalable access to our vast collection of unique data assets.

Our proprietary AI capabilities, built on a foundation of vast, high quality, and trusted datasets and deep domain expertise, continues to strengthen and amplify our leadership position and drive unparalleled value for our customers. From automating the analysis of complex documents and datasets, from our foundation in legal and regulatory, to our expansion into macro and microeconomic data, geopolitical information, and operational security, to predicting the impact of policy changes and identifying unmaterialized risks in global finance, security, and supply chains, our AI is transforming the way organizations navigate an increasingly uncertain and highly complex world. So we believe FiscalNote's strategy of investing in proprietary content and deep AI workflows will ultimately become the dominant way that customers will come to navigate legislative, regulatory, and political risk in the future. In short, we believe that we are in the right place at the right time.

In the first quarter, we made significant progress on several fronts. Most notably, we successfully completed the divestiture of Board.org, a strategic move that enabled us to reduce our debt by $65 million and strengthen our cash position by approximately $15 million, two outcomes that positively impacted our balance sheet. This transaction not only enhanced our financial flexibility, but also allows us to focus our resources on our core markets and on offerings where we see the greatest potential for long-term growth and shareholder value creation. The divestiture is also a reflection of FiscalNote's focus on strong and expanding product-level margins. As we gain revenue scale against our fixed operating costs, we anticipate realizing substantial incremental compounded growth in adjusted EBITDA. Having achieved adjusted EBITDA profitability in 2023, we now turn to driving sustained growth in the business. I will elaborate on this in two parts.

The first is in talking in depth about our AI and product strategy. The second is discussing our operational improvements, which are driving profitable growth. Our FiscalNote team has done an excellent job, particularly in new green shoot areas of growth, including our European policy business and our security risk businesses, and we expect double-digit growth from both. As these growth areas of our business continue to scale and become a larger proportion of our business, we expect their impact to start pushing up our overall growth rates. So let's spend a few moments talking about AI. Understanding our AI strategy is critical to understanding where we're going and where some of our growth will come from. I will first talk about where we are, and then I'll focus on where we're going with respect to our product strategy and our investments in AI.

As recognized by OpenAI, Google, and Microsoft, through our AI partnerships with each of these industry leaders, we are now focused on ensuring that we can surface our AI strategy to as many clients as possible, with the goal of driving growth in the future. Our trusted content and information, married with deep subject matter expertise, a leading AI organization, and access to thousands of existing customers spanning corporate and government agencies, enable FiscalNote to be at the forefront of generative AI. This represents a compelling opportunity to surface our product and data capabilities to more users through even more use cases... With the goal of providing a deeper dive into AI investments, I'd like to outline three stages of development that have allowed us to embark upon our journey into the current generation of AI.

Some of these stages are technical, but I believe they are important to outline in order to understand the foundation we have created and what it will enable. For simplicity, I'm going to classify our past 10 years as stage one. FiscalNote spent the past decade aggregating, cleansing, and building a massive repository of legislative, regulatory, and geopolitical information from over 80 different countries. We have spent a considerable amount of resources in developing and maintaining proprietary technology and deep expertise in building a market leader's position in these information fields. We have leveraged a range of technologies, including data ingestion, ETL pipelines, pre-processing, metadata tagging, taxonomy creation, machine translation, data scan creation, et cetera, and we've pointed and geared these technologies towards our industry vertical. We have built a powerful data ingestion platform.

We have pioneered a new category, and this market-leading position has enabled us to service thousands of customers, from Fortune 500 companies to government agencies. Our products analyze political and policy trends and provide us with a unique and unparalleled view into understanding the most pressing regulatory, legal, and policy challenges that our clients face every single day. The information services market has been making investments in AI at this stage for years, but now, with generative AI, we'll also see substantial advancements in the use of these technologies, such as AI-assisted coding, to accelerate the acquisition of new information sets and consequently, an acceleration in the addition of new product lines. Moving to the stage two. In August of 2023, we announced the creation of FiscalNoteGPT, the first proprietary platform incorporating generative AI and large language model capabilities customized for legislative, regulatory, and policy workflows.

FiscalNoteGPT takes public and proprietary legal, regulatory, and policy data, processes it using some of the most powerful large language model and AI technologies, and applies FiscalNote's long-standing expertise in AI and data collection, normalizing it in order to provide users with a reliable, trusted, and secure product experience, customized to meet the specific needs of the legal, policy, and regulatory domain. The initial capabilities that FiscalNoteGPT was built to enable include assisting customers by identifying pressing policy and regulatory concerns, generating new insights and recommendations, summarizing timely and relevant issues, and finding pertinent answers and information from FiscalNote's proprietary databases, consisting of thousands of trusted internal and external sources, which form the basis of FiscalNote's award-winning insights and actionable content. Launching this product in 2023 was an important milestone, and it set the stage for our next set of product releases.

Critical for our clients is the need for domain-specific AI systems that are based on known and accurate data sources. Also critical for our clients is the need for concise responses that do not include hallucinations induced by models trained on data assets that could provide misleading or incorrect responses. Despite the many major advances in AI and the use of LLMs in the technology industry, further domain-specific systems are needed to advance the expert use case that our clients require to fund their day-to-day legal and regulatory analysis. FiscalNote has developed a domain-specific approach in building our FiscalNoteGPT product, and we consequently address the unique complexity that exists in legal and regulatory worlds and believe that as we further develop FiscalNoteGPT, it will become a mission-critical service to our customers across the legal, policy, and regulatory industry.

In stage three, FiscalNote, in the first quarter of this year, successfully completed the creation of a copilot and reasoning platform that leverages the data from stage one and verticalized LLM in stage two to build extensible and repeatable AI agents and copilots. As you may know from following other AI industry developments, the ability to deploy agent technology in combination with large language models is fueling significant improvements, especially where deep domain expertise is required. As such, our new platform enables us to do two things. First, our product teams can rapidly develop AI agents and AI-driven chat interfaces capable of marrying our AI technology, including FiscalNoteGPT, with FiscalNote's authoritative content and insights to bring significant productivity benefits for the industry. In other words, we created an AI copilot and agent creator.

This copilot creator allows our developers to create AI agents and enables us to leverage our content and information and language models to accelerate our ability to bring generative AI capabilities to our portfolio and markets without the added cost of rebuilding our core infrastructure every time we want to release a new product or address a new AI agent or copilot use case. We have consequently updated our product roadmap to accelerate the launch of these new AI copilot products, leveraging various parts of our AI copilot creator that can launch new products on substantially the same code base. In other words, new AI copilots and AI agents will not be contingent on a massive investment in R&D, and we believe this will drive a substantial increase in our ability to launch dozens of domain-specific AI copilots.

The second thing that our copilot creator enables is that because the copilot creator relies on authoritative information, we're also able to control substantially for hallucinations and other problems with the generative AI space that cannot be obtained from the off-the-shelf AI models such as GPT-4, Anthropic, Mistral, and others. In effect, we've created a reasoning engine in the legislative and regulatory categories. Our methodology and reasoning engine allows for fact-checking of information and limits the exposure of proprietary company data into third-party large language models when we leverage them in limited cases, enabling deeper trust of generative AI in our space. Unlike other platforms in the industry that leverage other people's data and other people's AI models, FiscalNote has built its own engine for collecting information and its own AI models adapted for the legal, legislative, and regulatory professions.

FiscalNote is consequently best positioned to provide AI leadership in the legislative, regulatory, and policy fields. Given that we have been in the market since 2013 with our products, given our comprehensive global client base, and given that we made a conscious decision to develop deep expertise in data aggregation and AI modeling in key areas like summarization and machine translation, we believe that we are in the right place and at the right time to capture the upside that sits in front of us. Today and going forward, FiscalNote will leverage the data from stage one, the AI models from stage two, and the copilot and reasoning platform as a service from stage three to begin launching a series of AI copilots and agents that collectively will build a powerful legal, regulatory, and geopolitical AI assistant, and eventually, the world's most powerful AI lawyer.

Similarly, we will do the same to support adjacent personas across the span of strategic risk and opportunity. The goal here is to capitalize on our decades of data aggregation and deep domain knowledge and launch dozens of these new point solution AI copilots in and around the legal, regulatory, and strategic risk industries, and thereby radically transforming the work and productivity of our customers. FiscalNote's new AI copilots will be revolutionary new AI agents, fine-tuned for regulatory and risk management professionals to facilitate their day-to-day work on key tasks related to legislation, regulatory compliance, advocacy, constituent communications, and global risk.

With this, we are launching what we see as an incredibly powerful generative AI platform that can create and rapidly deploy a series of copilots that can expertly perform time-consuming, domain-specific tasks, free up substantial amounts of time for our customers, and provide unique and valuable insights that were not possible before. These AI agents are not static, and importantly, will rapidly improve over time as our technology continues to develop and as we deploy our AI-based products and services to our extensive client base. We launched our first AI agent, StressLens, with the real-time ability to quantify the behavioral impact of leading decision-makers and influencers across the financial, regulatory, and government domains.

StressLens includes an innovative AI agent capable of detecting changes in tone, cadence, and physical movements, deciphering the intricate language of human emotions and the intentions with unparalleled accuracy, while showcasing a groundbreaking leap in technology that will revolutionize the way humans interact with machines. StressLens' leading AI technology can now help us understand whether an executive on an earnings call is uncomfortable with their numbers, whether a policymaker is nervous, or whether there is a heightened level of discomfort or disagreement on a specific topic among a group conversation. Whether in business negotiations or public speaking engagements, StressLens serves as a trusted ally, providing real-time insights into the underlying emotions driving human interactions. As the world marches towards a future where human-AI collaboration becomes ubiquitous, StressLens stands at the forefront, spearheading a paradigm shift in how we perceive and interact with technology.

FiscalNote has filed a patent on this technology and has also begun exploring making the technology available beyond the legislative, regulatory, and risk spaces to expand the use of StressLens in other AI markets where detecting human emotion is important, such as public relations and media training, witness preparation for litigation, et cetera. The second AI agent, our Global Intelligence AI copilot, was launched last week. The Global Intelligence AI-powered assistant was designed to help customers assess the shifting global landscape, manage emerging developments, and mitigate risk involved with the world's most pressing geopolitical, macroeconomic, security, and regulatory challenges. Providing macroeconomic and country risk analysis, the Global Intelligence copilot spans expert content across our geopolitical, macroeconomic, and security and risk portfolio, featuring Oxford Analytica, FrontierView, and Dragonfly.

It enables FiscalNote users to ask questions related to a wide range of issues, such as geopolitical market analysis, forecasts on inflation and other key macroeconomic indicators, travel risk and advisory, ongoing military conflicts, immersion risk by country, and views on the policy impacts of a national election. We've begun to turn on this AI capability for our existing customers who are purchasing our geopolitical and macroeconomic intelligence products, with an increasing percentage of our users leveraging our AI capabilities each passing week. We expect that these new capabilities will not only drive improved usage, but also increase customer retention and growth in those products as well. Using the data from stage one, the AI models from stage two, the AI Copilot creator from stage three, we are rapidly bringing to market several AI Copilots with various skills.

Generative AI is creating a substantial step change and opportunity for our customers to automate large portions of their workflows and drive substantial efficiency. Our Copilot vision through 2024 and into 2025 and beyond encompasses skills such as the ability to summarize changing legislation regulations for multiple different markets, conduct analysis of changing laws and regulations, create research memos, search existing databases of information, review documents for compliance and risk analysis, and various skills that we plan to bring to market over the next several quarters. Developing these skills from negotiating, market analysis, legislative and regulatory drafting, and compliance, drafting memos, and et cetera, will collectively enable FiscalNote to build the most powerful legal, regulatory, and geopolitical AI assistant... and eventually, the world's most powerful AI lawyer. Similarly, we'll do the same to support adjacent personas across the span of strategic risk and opportunity.

We are already in market with the first of these solutions and expect to see accelerated development, combining our proprietary data information with our AI investments to bring these capabilities to our customers faster. From a go-to-market perspective, we are leveraging our substantial customer base of thousands of customers to drive copilot adoption overall and drive a deeper level of workflow integration with our customers. To make our copilots more accessible and broaden the lower end of our market reach, we're also introducing a product-led growth approach designed to engage individual users, regardless of whether or not they are in a small business or inside of a large enterprise. Our overall goal is to accelerate getting our AI technologies into the hands of our existing and new customers, while expanding the use cases for which our products are used.

By way of example, there are almost 500,000 elected officials in the United States, from the president to the local city council member, and they all need to understand pending legislation and regulations, and could consequently benefit from the use of FiscalNote and AI in their day-to-day jobs. That segment alone is potentially a $1 billion a year recurring revenue opportunity. Most importantly, the early response from our recently launched AI products has been extremely positive, and we continue to see significant potential to expand these offerings in the coming quarters.

In short, we are developing and will be accelerating the use of AI copilots, leveraging the thousands of existing customers we have, including government clients such as the United States Congress, the White House, and the DoD, as well as our corporate clients, including many of the Fortune 500 and their legal, legislative, regulatory, and policy departments. In the long run, our goal is to broaden adoption of our AI-enabled technologies by anyone that is in need of global policy and market intelligence. We believe that over the long term, all information services companies, from Thomson Reuters, Wolters Kluwer, to LexisNexis and others, will need to eliminate and transform their existing cloud-based workflow solutions to adapt to the changing customer demands of leveraging AI agents to query their systems. No longer will it take 15 clicks on a web app to find an answer to a question.

People will be able to simply query the ask, get the result, and leverage an AI agent to generate a report or run analysis. This is the future of AI-driven information services. Additionally, we have been approached by both existing and new business partners to explore data licensing and co-selling our copilots and AI agents. For instance, we are exploring working with some of the large language model companies to potentially license portions of our data, with the goal of exposing a larger universe of users to our data. Many similar such deals have been struck and announced in the press in recent weeks, and we believe it is a trend we can leverage to expand our market opportunity.

In particular, we anticipate that our proprietary data assets are uniquely valuable for such partnerships, and our ability to help our clients see around the corner on regulatory and policy matters will allow us to strike uniquely valuable partnerships. We are also exploring opportunities to leverage our AI agents into various adjacent sectors, ranging from earnings calls to PR agencies, to investment banks, to provide an ever-expanding universe of uses for our AI capabilities. I mentioned, for instance, the ability to use StressLens in the witness preparation process or in preparation for giving public remarks in front of Congress, regulatory investigations or the press, or in the analysis of earnings calls from various earnings call transcripts and financial data providers. Within the next quarter, we will be showcasing our AI platform and Copilots at an AI showcase day. We will be announcing it in the near term.

There, we will further elaborate on the future multi-year roadmap we've established as we build the most powerful legal, regulatory, and geopolitical AI assistant, and eventually the world's most powerful AI lawyer. Similarly, we'll do the same to support adjacent personas across the span of strategic risk and opportunity. Having spent the last 10 years in training, gathering, and building data for our vertical, we are accelerating the use of these tools to bring new value for our customers. We are incredibly excited about the future of automation and autonomy, and believe FiscalNote is leading the way for an AI-driven future for our customers across all the numerous sectors we cover.

We expect a combination of improved operating performance, which I'll further elaborate on, reallocation of our resources post-board divestiture, and the launch of our new AI copilots to return the company to a run-rate revenue growth of low to mid-teens, as we've enjoyed in prior years. Having elaborated on our AI growth strategy, let me now turn to our operational improvements. Our focus on upselling and cross-selling initiatives is ongoing. By aligning our teams and leveraging our AI prowess, we've enhanced the effectiveness of these strategies, which drive higher contract values and deepen our relationships with key accounts. We've also made key updates to our CRM and other software tools to better support these efforts, giving our sales and customer success teams the visibility and insights they need to identify and capitalize on growth opportunities. We've continued to add new data and intelligence to expand our customer value.

In the past several quarters, we added new geopolitical and security intelligence capabilities through the integration of Dragonfly. We also expanded our EUIT offering, providing stakeholder coverage and data for all 705 members of the European Parliament. Finally, we expanded our global policy and analysis coverage to over 80 countries, most recently to include China's national level and provincial level legislative and regulatory policy developments, positioning FiscalNote as one of the only providers of Chinese national and provincial regulatory and policy intelligence. Our European business now constitutes 15% of our revenues, and our European policy business and security intelligence platforms and risk businesses remain some of the fastest-growing in our overall product portfolio, growing north of 20% a year. We continue to explore doubling down in areas of accelerated growth to drive overall growth in the business.

Our large enterprise business also continues to grow, with meaningful new customers added in the last quarter. As we have doubled down and more heavily invested in larger, more strategic accounts for our line sales field to go after, we expect bookings growth to accelerate in the second half of the year to align with traditional seasonality and softer buying cycles. To that end, we're streamlining and simplifying our sales process, positioning FiscalNote as a unified provider of geopolitical and market intelligence solutions. By bundling our offerings in this way, we believe we can drive higher customer retention and more durable revenue streams. This is allowing us to bring together our various data sets, analytical tools, and workflow solutions into cohesive packages aligned to the key use cases and pain points of our customers.

It's about making it easier for them to access the full value of our overall platform and building deeper, more strategic relationships over time. As we look ahead, our path to reaching and maintaining low- to mid-teen compounded annual growth for 2025 and beyond remains clear. We're committed to executing on our long-term growth strategy, which centers on deepening and widening our penetration across core customers with our core offerings. This means continuing to innovate and expand our portfolio of AI-powered solutions, while also investing in sales and marketing to drive new logo acquisition and expand our presence in key markets like Europe, where we have a still nascent foothold, but see significant uptake potential. FiscalNote pushed the industry to combine cloud software and international information. We pushed the market to include point solutions like advocacy software, bundles with legislative information.

We pushed the market to include a larger and larger amount of information from countries around the world. We have been pushing and leading product innovation for years, and we will continue to do so in the future on the AI front. On the strategic front, I want to briefly touch on the ongoing review process. Our recent divestiture unlocks significant value, and our board will consequently continue to evaluate all such strategic opportunities, given the continued view that our overall business remains undervalued in this market. The Board.org transaction delivered a tremendous return on our initial investment and is a testament to the significant value of but one component of our overall business. The transaction also demonstrates our disciplined approach to M&A and our ability to create value through both strategic acquisitions, encompassing both purchases and divestitures.

We remain laser-focused on driving shareholder value by building a durable and profitable business for the long term, but the board will also continue to evaluate all options to realize value for our shareholders. We have a clear AI leadership position in our industry, and it generates consistent recurring revenues from a premier base of global customers. Our business drives consistent 80% adjusted gross margins and has an operational foundation with high operating leverage. We have been profitable on an adjusted EBITDA base for three quarters now, and our go-forward focus remains equally weighted on driving both bottom-line profitability and top-line growth. In closing, I'm incredibly proud of what the FiscalNote team has accomplished, not just in the first quarter, but over the past year. We've emerged as a leaner, more agile organization with a strengthened foundation for long-term, durable growth.

Our investments in AI, our focus on operational excellence, and our commitment to customer success have positioned us to capitalize on the vast opportunities ahead. I believe that the new AI-driven future will mean that the old way of analyzing legislative, regulatory, and geopolitical risk will become obsolete and will drive enormous opportunities for FiscalNote. As we move through 2024, we view it as the first step in a multi-year journey to earning our place in the history books and becoming a dominant player in our industry. Our strategy is simple: deep and wide penetration across our core customer base with our core offerings, translating into higher revenues and accelerating adjusted EBITDA margins as we realize incremental operating leverage. It's a powerful formula and one that I believe will create significant value for all of our stakeholders in the years ahead.

With that, I'll turn it over to Jon Slabaugh, our CFO, for a detailed review of our numbers. Jon?

Jon Slabaugh (CFO)

Thank you, Tim. My comments this morning will be brief, so let me jump right in and walk through the numbers for Q1 2024, starting with the income statement. Looking at revenues, total revenue for Q1 2024 was $32.1 million, slightly higher than the prior year period. Subscription revenue during the quarter accounted for 92% of revenue, in line with the company's historical trends. Digging deeper into revenue, with respect to our key performance metrics, we experienced some comparison challenges this quarter due to the divestiture of Board.org. In Q1 2024, run rate revenue was $122 million, and annual recurring revenue was $110 million.

On a pro forma basis, adjusting for the impact of the Board.org divestiture, both metrics for Q1 2024 were higher than the prior year period, and in Q1 2024, net revenue retention was 96%, a similar level to the prior year. Overall, revenue performance in the quarter reflects increases from organic growth and acquisitions during the prior 12 months, offset by decreases resulting from both dispositions and product discontinuations. Turning to expenses, principal operating expenses in Q1 2024 decreased versus the prior year. Specifically, the cost of revenue decreased by approximately $2 million or 19%. R&D decreased by approximately $2 million, or 32%. Sales and marketing decreased by approximately $3 million, or 23%, and G&A decreased by approximately $2 million, or 12%.

Generally speaking, the reductions in operating expenses principally reflect cost control measures instituted across 2023, as well as the impact of the sale of Board.org in sunset products. Looking at our profitability during the quarter, let's start above the line. Gross margins remained strong in the quarter, with Q1 2024 coming in at 77% on a GAAP basis and 85% on an adjusted basis, both increases over the prior year period. These improvements will primarily reflect the impacts of sunset products and improved efficiencies. We continue to pursue incremental efficiencies in our operations. Transitioning to below the line, GAAP net income for Q1 2024 was $50 million, an increase of over $68 million, reflecting the substantial positive impact of the gain on the sale of Board.org during the period.

EBITDA for Q1 2024 was $65 million, an increase versus the prior year, and primarily reflecting the impact of the gain from the sale of Board.org. Adjusting for non-cash and other non-recurring or one-time items, primarily the gain of the sale of Board.org, adjusted EBITDA was over $1 million, a significant improvement year-over-year, and importantly, the third consecutive quarter of positive performance for this key profitability metric. Turning to the balance sheet, at quarter end, we had cash and cash equivalents of $44 million, sequentially higher than year-end 2023 and slightly lower than the prior year period. As we've reported recently, the divestiture of Board.org enabled us to materially improve our capital structure with the addition of $15 million to cash.

Period-end-cash also reflects the ongoing initiatives to control spending across the company and prudently allocate capital to investments in the business with the potential for high growth and positive return characteristics. We have sufficient cash resources to fund our operations, and we do not see any immediate or intermediate need for additional capital. At quarter end, our total debt stood at $177 million, significantly lower sequentially than the level recorded at year-end 2023. This amount includes $93 million related to our senior term loan after giving effect of our $66 million principal repayment made during the quarter following the sale of Board.org. Simultaneous to that, we also amended our credit agreement with our senior lenders to, among other things, extend principal amortization payments for an additional 12 months, now beginning in August of 2026.

We continue to manage our debt service levels balanced by ongoing investments in CapEx and OpEx. Turning to guidance, today, we have reaffirmed our full year forecast for total revenues of $123 million-$127 million, total run rate revenue of $126 million-$134 million, and adjusted EBITDA of $7 million-$9 million. We also today provided the following forecasts for Q2 2024: total revenues of approximately $29 million and adjusted EBITDA of approximately $1 million. As a reminder, forecasts for both the quarter and full year reflect the impact of the Board.org divestiture, among other considerations. In summary, the overall performance of Q1 2024 was as expected.

Our forecast for the second quarter indicates a slight bias towards the second half of the year in terms of our full-year ranges, in line with prior year seasonality. As we've stated previously, 2024 is a year of transformation and a bridge to revenue and margin expansion beginning in 2025 and leading eventually to our long-term run rate revenue targets. The business remains strong. We continue to execute our operational efficiency initiatives in concert with our product strategy, all in pursuit of further strengthening our established position as a critical partner to our expansive global customer base. That concludes my prepared remarks. I'll turn it over to the operator to begin the question and answer session. Operator?

Operator (participant)

Thank you. Ladies and gentlemen, at this time, if you would like to ask a question, remember, it is star followed by the number one on your touch tone keypad. Our first question for today comes from the line of Tim Moore with EF Hutton. Your line is live.

Jesse Sobelson (VP of Equity Research)

Hi, everyone. This is Jesse Sobelson on for Tim Moore. Nice to be here. I see you guys disclose these annualized KPIs, but would you be able to disclose the revenue contribution from Board.org in the two months that it was part of your business last quarter, as well as the cadence of the $13 million or so last year, so investors can calculate the organic revenue growth achieved and what is embedded in forward guidance?

Jon Slabaugh (CFO)

Sure, Jesse, those will be disclosed when we file the Q. There'll be a bridge.

Jesse Sobelson (VP of Equity Research)

Okay, great. Thanks for taking my question.

Tim Hwang (Chairman, CEO, and Co-Founder)

[audio distortion].

Operator (participant)

Our next question comes from the line of Matt VanVliet with BTIG. Your line is live.

Matt VanVliet (Director of Equity Research)

Yeah, good morning. Thanks for taking the question. Tim, you outlined a number of new initiatives, obviously, mostly around AI and a number of these copilots, but how are you balancing the go-to-market approach, internally of, you know, sort of more and more products, and recently somewhat reduced total force at the company, and just sort of how you can keep everyone focused and selling the appropriate products in this current headcount?

Tim Hwang (Chairman, CEO, and Co-Founder)

Yeah. Well, why don't I start, and then I can have Josh kind of jump in afterwards as well?

... I think that from our perspective, what we view generative AI as is essential to, you know, delivering for our customers on an ongoing basis. And so, you know, we eventually expect that all of our customers will be using some form of generative AI, whether it's incremental to our existing products or embedded in our existing products. And so we're going product by product at the moment and deciding, you know, which product lines will need to have generative AI components embedded in their solutions to really deliver on the service versus which solutions we need to essentially serve as a cross-sell or upsell. But it's important to remember that it's all the same thing, right? We're using the same data.

We're developing these AI models on top of the same data that our customers are already subscribing to and trying to deliver incremental value, you know, from these solutions, right? So just to go give you one example, you might have one customer who subscribes to all of our our legislative information, trying to understand legislative data around the country, around the world. You know, currently what they're doing is they're exporting that information into an Excel spreadsheet and then manually, you know, creating these reports and whatnot internally. So the ability to add one-click report generation, for instance, is a tremendous value add for our existing customers.

Now, whether we package that as a part of our existing solution or upsell that, I think they're sort of more tactical decisions, but, obviously we see it as a, as a transition point from our existing product lines. But Josh, I don't know if there's anything else you want, you want to add on your end.

Josh Resnik (President and COO)

Sure, Tim. Yeah, Matt, I can just add a little more to it. So holistically, one way to think about it is we've spent a lot of time refining our product portfolio overall, making sure that we're investing in the right products that are going to drive sustained and profitable growth. And as we layer in new product offerings, then it's we've created ourselves more room to be doing that because of that past refinement of the portfolio. In addition, on the last call, I talked a lot about improvements that we've made over the past year to our commercial organization, how we've been able to drive greater performance and productivity as we've restructured the teams and made other changes. So that gives us greater capacity to do more, even, you know, as we've reduced our operating expenses over time.

In addition, we're very focused now on transformation of our overall product portfolio and shifting more to product-led growth, as Tim talked about, and that creates the opportunity to be launching newer products, be it copilots, AI agents, or other products into the portfolio and be more efficient in terms of how we drive that go-to-market going forward.

Matt VanVliet (Director of Equity Research)

Okay, helpful. And then, you know, have you explored the opportunity to, you know, given the advancements you've made around AI, and I think you're definitely on the leading edge here relative to a lot of other companies, but looking to go as more of a partner model, maybe even an embedded type of channel, in larger technology stacks where you're powering a lot of the copilot features, but aren't required to do all of the direct selling. What kind of opportunities do you think might be out there for that? And maybe what's holding you back from pursuing those?

Tim Hwang (Chairman, CEO, and Co-Founder)

Yeah, so I mentioned in the comments that, you know, we've been approached and have approached, you know, a number of players in the market, essentially doing exactly that strategy. And so, you know, maybe I can sort of lay out two or three different types of partners that we're speaking to at the moment. You know, one, including existing and kind of new and up-and-coming large language model companies that have cut, you know, data licensing or similar deals, you know, in terms of embedding some of the solutions into their existing language models and the like. Second, I would say are sort of service companies. So these are companies that are going out there that are implementing generative AI within enterprises today that can leverage FiscalNote's number of solutions that are out there.

And then third, I would say are sort of point solution companies, or other information services providers that may want to leverage different parts of our technology stack, to enhance their existing product offerings. So we mentioned StressLens and earnings call transcript providers or PR agencies that are using our technologies for media training and others. So we're taking a fairly wide view here in terms of looking at embedding our solutions into other technology partners overall.

Matt VanVliet (Director of Equity Research)

Okay. Very helpful. Maybe one more, John, if I can. You know, obviously, the sale of Board.org has given you a little bit more capital and flexibility, but, you know, talk of this kind of creating a copilot creator that should accelerate product development. How is that impacting kind of the puts and takes around the M&A strategy as you look ahead over the next several years? Is there still a need to sort of buy into various markets, or do you feel like you have the technology now that you can quickly get to market with new demand that's in the market?

Jon Slabaugh (CFO)

Sure, Matt. I think that as we think about the M&A strategy, it's, you know, we've, we've slowed down, but primarily that's had to do with both focusing on continuing to integrate the existing acquisitions or the previous acquisitions we made and continuing to drive opportunities there. But the market has a lot of consolidation opportunities for us to continue to integrate additional datasets that will be additive to our overall value proposition down the road. And we're just kind of waiting for, you know, we're kind of looking at value relative to our own valuation right now and, and, and, you know, liquidity and balancing organic growth versus inorganic growth. But it's not-- I think we still will continue to do acquisition when the time is right.

Matt VanVliet (Director of Equity Research)

... Okay, thank you.

Operator (participant)

Thanks for your questions. Ladies and gentlemen, once again, if you do want to ask a question today, remember, it's star followed by the number one on your touchtone telephone. Our next question is from the line of Zach Cummins with B. Riley Securities. Your line is live.

Zach Cummins (Equity Research Analyst)

Thanks. Good morning, and thanks for taking my questions. Tim, I really wanted to ask around, what, what's giving you the confidence that we could see an acceleration in overall bookings in the second half of this year? Obviously, you've made a lot of changes in terms of the operational team. Just curious of what you're seeing in terms of pipelines and maybe just incremental conversations with larger enterprises on that side.

Tim Hwang (Chairman, CEO, and Co-Founder)

Yeah, I mean, so I think that, you know, we track our pipelines quite closely throughout the years. And so from our perspective, we are seeing the pipeline that we need to sort of, you know, see the acceleration that we want, particularly on the enterprise front. But I think in combination with that, a lot of the ch-- the changes that Josh talked about, including, you know, the sales force realignments that we did, last year, that are placing a lot more of a heavy focus on large enterprises. That combined with the product enhancements and the bundling that we're talking about today, you know, should drive the acceleration that we're looking for.

But in addition to that, of course, there's a number of different initiatives inside the company that I laid out in the earnings call, that we also sort of see potential upside there as well. So, I guess, I, you know, Josh, you wanna kind of jump in here as well with some additional commentary?

Josh Resnik (President and COO)

Sure, Tim. Yeah. I mean, I'll just to echo what Tim just said, we're seeing success where we've put in place these go-to-market and commercial changes throughout the organization. So as we see them take root, we're seeing the benefits play out in different areas. And so, as I mentioned on the last call, where we have seen those, some of those that have been in place for some time, we put some more recently in place in Q4 last year, that we have confidence will bear out in the second half of this year. So when we look very deep in the metrics, we're seeing that progress start to take place. And then we're seeing just generally speaking, we're seeing good movement in terms of ACVs and the direction we want to see that go as well.

And so those, to us, are really good indicators of where we see the business heading in the second half this year.

Zach Cummins (Equity Research Analyst)

Understood. My one follow-up is just really around adoption of your new AI products. Really appreciate the deep dive into all the new solutions that you're rolling out into the market. But outside of some large partner, it seems like there's a great opportunity just to upsell some of these products to your existing enterprise base. So I'm just curious of how you're thinking about monetization, whether it be from within that base or continuing to broaden outside of that.

Tim Hwang (Chairman, CEO, and Co-Founder)

Yeah. So I think it just depends on the product line and, and what problems that we're solving for customers. So, you know, we launched, for instance, our geopolitical Copilot, you know, last week, and the expectation is that, you know, the rollout of the geopolitical Copilot will be to existing customers first. And we do see that as being a tremendous value driver, you know, not just in terms of, you know, driving new sales from a competitive perspective, but also driving better retention rates.

That being said, I think, you know, when you look at other copilots like StressLens or our up-and-coming kind of product roadmap, which we'll talk about, probably at our AI product day in the next couple weeks, you know, we're taking, you know, in certain cases, choices to create incremental modules to kind of find those upsell opportunities. So we're sort of taking it on a product-by-product basis and figuring out, is this a retention play? Is this a new sales play? Is this an upsell and cross-sell play? And then trying to figure out the best pricing and go-to-market model from that.

Zach Cummins (Equity Research Analyst)

Got it. Well, thanks for taking my questions, and best of luck with the rest of the quarter.

Operator (participant)

Thank you for your questions. Our next question comes from a line of Rudy Kessinger with D.A. Davidson. Your line is live.

Andres Lopez (Equity Research Associate)

Hey, guys, this is Andres for Rudy. Good quarter overall. I just had a quick question. Regarding the total subscription clients that were down 300-ish, do you have any commentary about it? How much of that came from the divestiture and how much was organic?

Jon Slabaugh (CFO)

Can you, can you say it one more time? The line broke up a little bit. To make sure I understood the question right.

Andres Lopez (Equity Research Associate)

Oh. Yeah, I'm just asking about the total customer count, the subscription clients that was down 300, or around 300. Just asking about how much of that came from the divestiture and how much was for something else, and if you could touch a little bit on that.

Jon Slabaugh (CFO)

Okay. I think, that really relates to the Board.org divestiture and the customers that were passed off to the buyer there. And we'll provide more details on that, like I said, in the, in the Q when it gets filed.

Andres Lopez (Equity Research Associate)

Okay, thanks.

Operator (participant)

Thank you for your question. Ladies and gentlemen, final call. If you do want to ask a question today, remember, it's star one on your phone. We have another question from the line of Mike Latimore with Northland Capital Markets. Your line is live.

Vijay Devar (Equity Research Analyst)

Yeah, hi, this is Vijay Devar for Mike Latimore. So, I believe you have briefly commented upon the strategic review in your prepared remarks, but if you could elaborate a little bit more on the types of options that you are considering to realize shareholder value? And at the same time, you have quantified the synergies that a strategy might consider?

Tim Hwang (Chairman, CEO, and Co-Founder)

Yeah, no, I appreciate the question. You know, at, at this time, we're not commenting further on the strategic review. I think the only thing that I would say is that, you know, we just divested an asset for 7 times ARR, you know, LTM ARR. And we've said pretty much consistently in every earnings call that we believe that the company is dramatically undervalued relative to peer comps, relative to, transaction multiples, that are going on currently in the marketplace, you know, relative to almost every, every major measure. And so, our board sees that. I think, I think we all see that, and, we're prepared to obviously continue to review all options that are available to us to, to try and drive, value for our shareholders.

Vijay Devar (Equity Research Analyst)

Mm-hmm. Okay, great. And, maybe I can sneak in a couple of other questions as well. On the sales cycles for new logos, do you see them shrinking with copilots and as well as how do you see the sales cycle for the government versus enterprise, at the same time, new versus upsells? Kind of any characterization of the sales cycle here will be helpful for me.

Josh Resnik (President and COO)

So, sorry, I just wanna make sure, this is Josh. Just wanna make sure I understood the question. This is a question about what we expect sales cycles to be for copilots. Is that right?

Vijay Devar (Equity Research Analyst)

Yes, at the same time, between the government and enterprise and new versus upsells. So any characterization around all these various factors.

Josh Resnik (President and COO)

Sure. So, generally, so generally speaking, in regards to copilots, you know, as Tim mentioned, that's more of a product-led growth, model. So, you would see, different sales cycles there than you would typically expect in something that might be a sales-led growth model and specifically focused on, say, enterprise and government. So you would expect to see, generally speaking, shorter sales cycles. The nature of those would depend on, you know, kind of each product, the nature of the audience, and the type of engagement that you seek. But typically for those, you'd see a model where someone has the opportunity to essentially try, you know, engage with the product in some way before they, actually purchase.

So it's a different nature of sales process and generally a more compressed sales cycle that you would expect to see. I think the second part of the question relating to breakdown of sales cycles between government and enterprise, we typically don't break down the metrics to that degree.

Vijay Devar (Equity Research Analyst)

Okay. Yeah, that should be helpful for me. Thank you.

Operator (participant)

Thank you for your questions. Ladies and gentlemen, that will conclude our question and answer session here for today. I would like to turn it over back to Mr. Hwang for any closing comments.

Tim Hwang (Chairman, CEO, and Co-Founder)

Great. Thank you, everybody, for joining on the call. As mentioned, we have an upcoming AI product day and, some additional materials online for people to take a look at. So appreciate everybody jumping on, and if there are any additional questions, feel free to reach out. Thank you very much.

Operator (participant)

Thank you. Ladies and gentlemen, that will conclude today's FiscalNote first quarter 2024 financial results conference call. Have a great day. We'll talk to you later.