FiscalNote Retail Investor Fireside Chat at NYSE SHARE Series - April 10 2023

Awesome. Well, we are a newly public company, so I'm going to just give a little bit of an update here for everyone. I'll just stand up here and do a presentation and still be happy to answer any questions from the audience here as well. Basically, what FiscalNote does is we are a technology company that provides a subscription service for customers to be able to access legislation, regulations, government documents, court cases, government filings around the world. And so you can think of us almost like the Bloomberg terminal for laws and regulations. Instead of looking up equities and commodities and fixed income and the like, people use our platforms to monitor political updates or legislative updates, regulatory updates from the United States, from the European Commission, from countries around the world. And then of course we assist those organizations in really trying to understand how politics and legal updates may potentially impact their organizations.

The business is fairly simple, but we have three major customer segments. The first customer segment is government agencies. We service everyone from the Executive Office of the President, the Pentagon, the DoD, every member of the House and the Senate in the United States Congress, the Federal Reserve, and hundreds of other civilian agencies use FiscalNote every single day to monitor legislation, regulations for the United States and of course around the world. We have a plurality of the foreign ministries and embassies around the world who rely on FiscalNote to conduct global diplomacy, trade negotiations, and to understand political machinations in other countries around the world.

We do also have a second customer segment, which is our corporates. So about half the Fortune 100 currently use FiscalNote today to monitor political or regulatory updates that are going on, whether it's the war in Ukraine or some coup d'état in Southeast Asia or just a regular presidential election in the United States. We are monitoring all these updates for these companies so they can make decisions about how to make foreign direct investments, how to reallocate capital, wherever the case may be.

And the last customer segment that we have is our trade associations and our nonprofits who essentially stay in Washington. These are Beltway, K Street customers. So every major trade association politically you can think of currently relies on FiscalNote to participate in the democratic process overall.

We are highly diversified from a customer base perspective, about 5,000 customers globally, pretty much in every major sector. The more regulated the sector is, as you can imagine, the more demand there is for our products. And so our customers range from folks who are trying to understand pharmaceutical regulations in emerging markets or are trying to make foreign direct investments in places like Latin America or Southeast Asia or sub-Saharan Africa. I mean, of course, we're essentially trying to help them understand how laws and regulations are changing in each of these markets.

As you can probably imagine, if you just open up the Wall Street Journal or the Financial Times these days, there's always some new CEO getting dragged in front of Congress, some company getting fined from a European Commission perspective, especially the European Commission. You've got trade wars going on in China, you've got major political unrest in places like the Middle East and Southeast Asia. And so now more than ever, companies and organizations need to understand how regulatory or political updates may potentially impact their institutions. And so for that, of course, we build FiscalNote.

The way our technology works is we are an AI company at our heart. We've been an AI company for the last 10 years or so. Essentially, what we do is we take the tens if not hundreds of billions of pages of legal documents from around the world, multiple different countries and multiple different geographies, crunch all that information, and use text processing, natural language processing, artificial intelligence to summarize, classify, categorize large and vast amounts of legal information in real time. And so if there's a subcommittee hearing happening in Congress on some new fighter jet program at three in the morning, we pick up on it. If the European Commission is debating some new ethics regulations in biotechnology, we pick up on it. If the Chinese government is thinking about introducing some new policy or some regulation around trade policy, we'll pick up on it, and we'll use artificial intelligence to essentially analyze the updates for our customers.

Just FiscalNote in a nutshell, we are, I would say, a traditional subscription information services software company. 80% gross margins, 37% growth in the last year. As I mentioned, over 5,000 customers, over half the Fortune 100. And we've got just over about 100% in net dollar retention, which means that this business, when you sort of take a step back and look at it very objectively, is effectively an annuity business. We have a subscription business that renews and compounds year after year after year that is underpinned by a blue-chip set of government and enterprise customers that pay us upfront annually.

And we essentially drive growth effectively by driving renewals every single year off our customer base and then getting a handful of new customers every single year and compounding that year after year after year after year. You may be familiar with some other companies in our category, companies like S&P, Bloomberg, FactSet, or others in adjacent categories like Clarivate or Avalara, CoStar. This is a tried and true industry where companies essentially source information, package information, and then sell it on a subscription basis year after year after year.

The one thing I would say is that at FiscalNote, what we're doing is we are creating this category in legal, regulatory, and policy. We are the business that people come to when they want to understand how laws and regulations potentially impact their institutions. They come to us and we essentially sell them data subscription products that help them make sense of all the chaos.

Just in a nutshell, FiscalNote, we operate in this entirely large market with a substantial amount of tailwinds from increasing geopolitical complexity. We're essentially underpinned by thousands of blue-chip government and enterprise customers, as I mentioned. Literally everyone from President Biden's office to, last two weeks ago, we just announced a major deal with NATO and the European Commission using our subscription products who really rely on FiscalNote for really kind of information about geopolitical updates.

We are an AI and data-driven software provider. About two weeks ago, we also announced a major partnership with OpenAI, which effectively embeds some of the FiscalNote data into the ChatGPT platform and enables our technology platforms to get stronger and stronger with respect to our market leadership in the legal AI space. And of course, we've got multiple growth avenues both organically and inorganically that we've proven out year after year after year. And so with that, certainly happy to answer any questions, but I'm happy to dive into it here.

Yeah, so before we started the company, I actually used to be in government. And so I worked for back then Senator Obama, who was running for president back in 2008, 2009. And one of the things that you realize when you're in government is how inefficient government is, which is obviously what everyone takes for granted. But one of the things you also realize is that government spends a tremendous amount of time trying to understand what other parts of the government are doing. You can imagine people in the White House are obsessed with what's going on in Congress, when the regulatory agencies, people in the State Department or the intelligence communities are also obsessed with what other governments are doing around the world. I mean, to me, this seemed like such a simple problem. We can use technology to aggregate everything that government's doing around the world and then build effectively the next Bloomberg.

And so that was the original thesis for the idea. This company, we had an idea, three guys on a laptop, bought a one-way ticket to Silicon Valley, and just started coding and building this business from the ground up.

Yeah, I mean, there's so many examples that we have. From the United States military using our platforms to understand annual appropriations. And so if you've ever wondered how government operates, you've got a bunch of people in the Pentagon who need to understand how budget and appropriations are moving and every inch of that, right? So how much is allocated for body armor or how much is allocated for this new defense project or whatever the case may be, they're tracking all of that on our platforms. Right? So if the Defense Department wants to say, oh, we really need this allocation, they will try and follow that information through the FiscalNote platform all the way from its introduction through its passage.

Companies rely on us all the time. I mean, I take a company like Nestlé for example, right? They've got operations in pretty much every country on the planet. Their executives are under a tremendous amount of pressure around things like sustainability, food packaging, recycling, so on and so forth. And so how do companies understand what their regulatory obligations are? Well, they need to go on FiscalNote essentially to monitor those updates. Let's say you're a large restaurant chain and you want to follow something as minute as plastic straw bans across the 90,000 cities in America. Well, you basically got to be very proactive about it. You have to change your supply chains to react to that information. And so they go onto our FiscalNote platforms and they get a data feed. Whoever is responsible for procuring plastic straws across that company essentially will have to go on our platform and understand what that information is.

So our business is very simple. We charge on a per-dataset and then a per-seat basis. So if you want European regulations and you want Italian court cases and you want legislative information from Japan, we will charge you, you know, five, ten, fifteen thousand dollars a year for each of those datasets. And the little sense just multiply by the number of users that you want. And so very simple pricing, that's pretty much it. There's not a lot of complexity around that.

I would say that most of our customers will typically start with a ten thousand dollar, fifteen thousand dollar, one country, couple user contract subscription. And they'll say, oh, this is really useful. Why don't we expand our usage of this platform into another market or another market? Right? So take for example, let's say a large pharmaceutical customer that operates in 60 or 70 different markets. They'll initially come to us and say, hey, we really want to understand U.S. updates in the FDA or in the U.S. Congress. That's a very, very tiny contract with maybe a dozen or so users. And then they'll realize they have the same issue in the European Commission and in Australia and in Japan and in Latin America. And so each and every single time, we'll upsell them another country, another country, another country. And that ten, fifteen thousand dollar customer becomes a million dollar customer a year. Again, all subscription, all 80-plus gross margins that effectively enable us to have that compounding annuity year after year after year as a business.

Yeah, so what's really interesting in the technology field right now is that I would say that the advancements in artificial intelligence are akin to the introduction of the personal computer in the 70s and the 80s. This is probably a substantially revolutionary time period in technology where the interactions with our computing systems, which have traditionally been graphical interfaces, point and click or touch pads and the like, will effectively evolve towards more text-based or speech-based solutions.

And so in that type of environment, the companies that are going to win in the technology field are the ones that are going to have data advantages. These are companies that have been collecting and processing data for years and years and years that have compounded some specialized expertise in their particular fields. Right? So you can imagine a healthcare company that's been aggregating information around therapeutics or around symptoms or whatever the case may be, or a financial company that's aggregated decades of history around trading patterns and the like, or in our case, a legal company that's aggregated tens, hundreds, thousands every single day of pages of legal text effectively trying to understand how laws and regulations are changing around the world.

So FiscalNote, what we've been doing is we've been aggregating legal information for almost a decade, and we have spent tens of millions of dollars of R&D budgets effectively building a substantial repository of what governments are interested in and what they're working on at any given time. So we were of course selected by OpenAI for inclusion in their plugin program with ChatGPT. We believe that there's a whole host of partnerships we're going to continue to execute in the future that will essentially accelerate our continued data aggregation as much as possible and enable us to be able to have better insights and faster technology development in this current race for technology.

And so I do think that the OpenAI partnership probably demonstrates very clearly that we are the market leader and that we have an ability to essentially accelerate our market position to continue to be the fastest and most innovative player in the legal AI space overall.

Yeah, so a couple thoughts. This market is highly fragmented and still very undigital. So most legal departments are still in the process of massive digitalization and automation. So quite frankly, when we first go into a customer, let's say it's Medicare and Medicaid services or a large insurance company or the like, most of the time they're not using anything. They're not using anything technological, right? So they're essentially doing things by pencil and paper or by hiring a ton of people in compliance or whatnot. So a lot of what we have to do is evangelize that there's a better way, that there's a technological way to essentially aggregate information, understand political updates, whatever the case may be.

In the few times that we do see competition, we see competition sometimes from companies like Bloomberg or Thomson Reuters or LexisNexis who traditionally have been in more judiciary or court case or litigation-oriented fields but increasingly obviously see the opportunity in the regulatory and legislative side.

I would say that our advantage is the fact that we are a company that has traditionally focused a lot of our efforts in technology and particularly in things like artificial intelligence. Most of the information market, i.e., some of our competitors, have not invested substantially in AI. And so what you end up happening is they have these bloated-out organizations, tens of thousands of employees in emerging markets that are manually collecting information, manually processing information, and it limits their ability to do things like aggregate large amounts of information and to be able to run analytics and summarization on top of it or other value-add services that enable better and more deeper use of information.

And so I would say that for us, our AI advantage is something that we are pressing pretty hard and something that enables us to be able to continue to deliver better insights as well as more data for our customers over time.

Yeah, so like I said before, we're a really durable and enduring business. Our business model is very simple. We take several thousand customers that pay us a certain amount of money every single year. Those set of customers essentially compound, recur, renew every single year at rates of north of 100% in net dollar retention rates. And so we already knew December 31st of last year what the baseline of our revenue is going to be in 2023, and at the end of 2023, we will know the baseline of our revenue in 2024 and beyond. And so this is an extremely predictable business. In many cases, we sign two, three, five, seven-year multi-year contracts that give us even more visibility into what our contracts look like into the future.

Add to that, this is a highly profitable business. We've got 80% adjusted gross margins. And effectively, what that means is that we can either choose to step on the gas pedal and continue to drive growth, and we can also consistently drive some level of profitability today and into the future. And so we have a high level of confidence in our revenues, we have a high level of confidence in our gross margins, and then of course, really the cost structures within our control. And so we have set basically as a business that we expect to achieve just-leverage profitability in the fourth quarter of this year while still driving good growth into the future. And over time, we expect free cash flow margins to achieve industry-normative margins at scale. So if you look at companies like the CoStars, the Morningstars, the FactSets, the Thomson Reuters of the world that generate north of 20, 25, 30% free cash flow margins, and they can because they have that subscription recurring revenue base that recurs year after year after year. And so that's what gives us a lot of confidence into our business and the future of our business.

Well, so the capital allocation strategy that we have as an organization is to obviously drive the highest value for our shareholders over the long term. And so what we're trying to do here is grow a highly enduring and durable business, and our capital allocation strategy does reflect that. I think for right now, our expectations are that we will drive mid-to-high-teens organic growth year after year after year, and then on top of that, we will drive another mid-teens or so inorganic growth year after year after year. So for a compounded rate of about 30% plus or minus for the next several years.

We believe that given the long-term subscription business that we have and the 80-plus gross margin business that we have, that we can build an extremely profitable and growing business into the future. Of course, add to that the fact that, again, like I mentioned in the presentation, we operate in a market that is growing with a lot of demand for our products. So as geopolitical complexity increases, as regulatory complexity increases, we're going to see that customers are going to continue to want more and more information that responds to those challenges overall.

So as you think about sort of the allocation of the balance sheet cash that we have, obviously the first thing is really driving those two levers of growth that I talked about in terms of organic and inorganic. I think the other thing that I would highly mention right now is that because of the adjusted EBITDA kind of target that we have as well as the recurring nature of our business, we do not expect capital raises to get to the next stage of growth in the business. And so we are fully capitalized to profitability and beyond. And frankly, right now, don't need to interact with the capital markets. And so I think that is the goal for the business. We've always set targets for ourselves and we just want to continue to stick to our plan.

So we're a very disciplined acquisition company. So typically what we do is we'll find a tiny information or data business in another market. Let's say it's a two, three, four million dollar revenue, recurring revenue Australian legislative business or a Brazilian court case business or something. We buy the business. Essentially, we go to our 5,000 customers and we ask them, how many of you want Brazilian laws? How many of you care about this product? Maybe 400 of them raise their hand and say, okay, this is what we want. We essentially take that business and we triple or quadruple the revenues over a very short amount of time period, two, three, four years. And then we just milk the cash flow and just do it over and over and over again.

And so it's a very simple acquisition strategy. There are a ton of companies like this around the world. And so we do have a dedicated corporate development team that's going out trying to find these businesses and bolt them on into our business over and over and over again. We are extremely disciplined about the valuations that we pay, probably even more than we were in the past. Paying a mix of cash, more existing credit facilities, some form of equity, maybe in the form of a convertible bond or something, and then some form of an earn-out. And so effectively limiting the level of shares that need to go out for the business in terms of whenever we make an acquisition and driving an extremely accretive acquisition model that gets even more creative as we drive execution of the post-integration merger.

Yeah, it's a great question. So we do have in-house machine translation experts that focus specifically around how to translate legal taxonomies from one language to another. I think that's one of our specialties in the sense that we've been able to aggregate a tremendous amount of training data in multiple different languages and essentially enable us to service customers around the world. And so one thing I didn't mention was that we have current operations in the U.S., the European Commission, in Korea, in Singapore, in Australia, around the world. And so that effectively enables us to have not only the data sets but also the customer base to be able to continue to train our information over time.

Well, I think that we are a newly issued company. We just went public second half of last year. I think that there's a lot of technology companies that went public at the same time. That being said, I mean, we've got our business which is extremely durable, extremely recurring, subscription-based. And so I think that we're obviously trying to explain to the street as a new public company about what we do. But it just comes down to just taking some time to do it. And so that's pretty much it. I mean, we just need to differentiate, of course, from the many, many companies that went out there in the second half of last year.