10-Q: FiscalNote Holdings Reports Q3 2024 Results, Revenue Declines Amid Strategic Shifts

FiscalNote Holdings experienced a revenue decrease in Q3 2024, driven by strategic divestitures and product rationalization, while also implementing cost-saving measures.

Summary

• FiscalNote Holdings reported a decrease in total revenue for the third quarter of 2024, with revenues falling to $29.4 million from $34 million in the same period last year.
• Subscription revenue decreased by 9.4% to $27.2 million, while advisory, advertising, and other revenue declined by 44.3% to $2.2 million.
• The company's operating loss improved to $6.8 million, compared to $13.5 million in the third quarter of 2023.
• Net loss for the quarter was $14.9 million, a slight improvement from the $14.5 million loss in the same period last year.
• For the nine months ended September 30, 2024, the company reported a net income of $22.9 million, which includes a gain on the sale of Board.org, compared to a net loss of $64.7 million for the same period in 2023.
• The company's annual recurring revenue (ARR) was $109.5 million as of September 30, 2024, down from $126.1 million at the end of 2023.
• The company sold its Board.org business in March 2024 for $90.9 million in cash, resulting in a pre-tax gain of $71.6 million.
• The company has implemented cost-saving measures, resulting in a reduction of approximately 175 full-time equivalent employees since the beginning of the third quarter of 2023.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with some positive developments (improved operating loss, net income for nine months) but also significant concerns (revenue decline, ARR decrease, financial covenant risks). The overall sentiment is cautiously negative due to the challenges in revenue growth and financial stability.

Positives

• Operating loss improved significantly year-over-year, indicating better cost management.
• The company achieved a net income of $22.9 million for the nine months ended September 30, 2024, driven by the sale of Board.org.
• Cost of revenues decreased by 40.3% in Q3 2024 compared to Q3 2023, reflecting cost-saving measures and the sale of Board.org.
• Research and development expenses decreased by 28.4% in Q3 2024 compared to Q3 2023, indicating improved efficiency.
• General and administrative expenses decreased by 26.3% in Q3 2024 compared to Q3 2023, reflecting cost-cutting efforts.

Negatives

• Total revenue decreased by 13.4% in Q3 2024 compared to Q3 2023, indicating a slowdown in business activity.
• Subscription revenue decreased by 9.4% in Q3 2024 compared to Q3 2023, suggesting challenges in retaining and acquiring new subscribers.
• Advisory, advertising, and other revenue declined by 44.3% in Q3 2024 compared to Q3 2023, indicating a significant drop in non-subscription revenue.
• Annual recurring revenue (ARR) decreased to $109.5 million as of September 30, 2024, from $126.1 million at the end of 2023, reflecting a decline in future revenue potential.

Risks

• The company's ability to maintain compliance with financial covenants is uncertain, raising concerns about its ability to continue as a going concern.
• Slower than anticipated client decision-making on new logo sales, cross-sells and upsells, together with softer than expected renewal rates among existing clients, may impact future revenue.
• The company's reliance on debt financing and the potential for dilution from future equity issuances pose financial risks.
• The company faces competition and competitive pressures in the markets in which it operates, including larger well-funded companies shifting their existing business models to become more competitive with FiscalNote.
• The company's ability to achieve and sustain organic growth is uncertain.

Future Outlook

The company expects to implement a number of actions to accelerate growth into 2025, including product enhancements, improvements to client success and support, and cross-selling opportunities. The company also plans to assess opportunities to acquire complementary businesses.

Management Comments

• Management expects that significant on-going operating and capital expenditures will be necessary to continue to implement the Companys business plan of entering new markets, future acquisitions, and infrastructure and product development.
• Management will continue evaluating the Company's product portfolio for additional rationalization opportunities, both to further reduce the complexity of the business and ongoing operating expenses and to raise capital through opportunistic divestitures where appropriate.

Industry Context

The company's performance reflects broader trends in the technology sector, including slower client decision-making and competitive pressures. The company's strategic shifts, including divestitures and product rationalization, are aimed at improving its long-term financial health and growth prospects.

Comparison to Industry Standards

• FiscalNote's revenue decline contrasts with some SaaS companies that have shown growth in the same period, such as Salesforce and Adobe, which have reported revenue increases in their recent quarterly results.
• The company's ARR decline is a concern, as many SaaS companies focus on growing ARR as a key metric for future revenue growth. Companies like Zoom and Shopify have demonstrated strong ARR growth in recent quarters.
• The company's cost-cutting measures are similar to actions taken by other tech companies facing economic headwinds, such as Meta and Amazon, which have also implemented layoffs and reduced expenses.
• The sale of Board.org is a strategic move similar to divestitures seen in other tech companies that are focusing on core business areas, such as IBM's sale of its Watson Health business.
• The company's debt levels and financial covenants are a concern, as many tech companies are focusing on maintaining strong balance sheets and liquidity, such as Apple and Microsoft.

Related Party Transactions

• The company issued a convertible note to EGT-East, LLC, a third-party lender, in connection with a strategic commercial partnership. Era Global Technologies, LLC, which manages EGT-East, LLC, has co-invested in various ventures at which Mr. Timothy Hwang, the company's Chairman, Chief Executive Officer and Co-Founder, is serving as a director.

Stakeholder Impact

• Shareholders may be concerned about the revenue decline and the company's ability to maintain compliance with financial covenants.
• Employees may be affected by the company's cost-cutting measures, including headcount reductions.
• Customers may experience changes in product offerings and support as the company rationalizes its portfolio.
• Creditors may be concerned about the company's ability to repay its debt obligations.

Next Steps

• The company expects to implement a number of actions to accelerate growth into 2025, including product enhancements, improvements to client success and support, and cross-selling opportunities.
• The company will continue to assess opportunities to acquire complementary businesses that supplement its existing platform or enable it to enter adjacent markets.

Key Dates

Keywords

FiscalNote, revenue, ARR, subscription, operating loss, net income, cost savings, debt, acquisitions, divestitures, financial covenants, going concern