FiscalNote (NOTE) Q2 2023 Earnings Call Transcript

FiscalNote (NOTE 7.87%)
Q2 2023 Earnings Call
Aug 09, 2023, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the FiscalNote second-quarter 2023 earnings conference call. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] Thank you. And I will now turn the conference over to Sara Buda, vice president of investor relations. You may begin.

Sara Buda -- Vice President, Investor Relations

Hi, everyone. Welcome to the FiscalNote Q2 2023 earnings call. During this call, we may make certain statements related to our business that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance but rather are subject to a variety of risks and uncertainties.

Our actual results differ materially from expectations reflected in any forward-looking statements. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC's EDGAR system and our website, as well as the risks and other important factors discussed in today's earnings release. Additionally, non-GAAP financial measures and other KPIs will be discussed on this conference call. Please refer to the tables in our earnings release and the Investor Relations portions of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure.

With that, I'd like to turn the call over to FiscalNote's chairman, CEO, and co-founder, Tim Hwang.

Tim Hwang -- Co-Founder, Chairman, and Chief Executive Officer

Thank you, Sara. On today's call, we review our second-quarter results, our outlook for the remainder of the year and discuss our durable compounding revenue, strong gross margins, and the macro trends driving our business. I'll also talk about our Q3 guidance and our expectation to reach the inflection point of adjusted EBITDA profitability in Q3, a quarter earlier than expected. This will be a tremendous milestone for the company and reflects the hard work of the entire FiscalNote team to be able to achieve this ahead of schedule.

Also touched on our positive growth trends, particularly with our enterprise accounts, as we innovate around new products and customer segments. I'll then turn it over to our CFO, Jon Slabaugh, to talk about the details of our financials as we continue to deliver on our strategy as a profitable, long-term growth compounder. Let me start with a very brief reminder of our mission here at FiscalNote and the value we bring to more than 5,000 customers every single day. At FiscalNote, we're on a mission to help our customers make sense of the complicated and constantly changing world we live in by delivering our proprietary AI-enabled platform that aggregates and organizes regulatory, political, and macroeconomic information and analyze the impact on their organization.

Changes in policies, regulations, and laws impact the decision-making of almost every organization around the world. With our proprietary AI capabilities, we aggregate, synthesize, and analyze mass amounts of legislative policy, regulatory, and macroeconomic data and information around the world and provide actionable intelligence to customers in a subscription model. As such, we're building an enduring company for the world's most important and influential decision-makers from hundreds of government agencies and public sector customers from the Department of Defense, the White House, every member of the House and the Senate and the U.S. Congress, the Federal Reserve, and public sector organizations in Europe and Asia to major corporate customers, including more than half the Fortune 100.

These customers rely on FiscalNote every day to discover, process, and navigate the impact the government policy-making on the organization and, more importantly, to take actions which achieve their business objectives and minimize political and economic risk. This forms the basis of our durable and long-term growth. We have become an increasingly mission-critical and ubiquitous Bloomberg terminal of political, legislative, and regulatory information at the local, state, federal, and global levels. The same way that other information companies, such as S&P Global, IHS Markit, FactSet, MorningStar, CoStar, and Avalara have innovated in their respective information field, FiscalNote continues to deliver mission-critical information that has a direct impact on our customers' operations.

We've invested tens of millions of dollars and almost 10 years building a defensible combination of data, intelligence, and AI technology to collect, synthesize, and make sense of an exploding pace in volume of dynamic unstructured, regulatory, political, and legal information around the world and the soft workflows to help our customers respond. With our AI pedigree and our vast array of validated trusted data, we are in a unique position and have a clear competitive advantage. Now, let me start with a summary of our strong Q2 results and our ongoing momentum as we reach the inflection point of adjusted EBITDA profitability next quarter and beyond. In Q2, we delivered another strong quarter of growth with revenue of 32.8 million.

This marks an increase of 21% year over year and is yet again consistent with the guidance we provided. We continue to benefit from our recurring revenue streams from a diverse customer base of thousands of organizations that renew their contracts year after year. We also enjoy consistent high gross profit margins. Q2 adjusted gross profit margins were 80% in the quarter.

These margins are a hallmark of FiscalNote and stem from our SaaS business model, AI pedigree, and data-rich products, all of which form the basis for strong free cash flow in the future. On the bottom line, our second-quarter adjusted EBITDA loss was 4.3 million, also in line with guidance. Most importantly, we are pulling forward our profitability goals with an expectation for adjusted EBITDA profitability in Q3. Further, through a combination of ongoing growth, high gross margins, and a diligent focus on cost management, we expect to continuously build on our adjusted EBITDA profitability and generate free cash flow in the near future.

Our cash position at the end of the quarter was 38.1 million, and we have 94 million of additional debt capacity subject to conditions. We continue to have sufficient capital to fund our growth. And as we stated, we are fully capitalized and do not require any additional capital raises to fund operations. Turning to management KPIs.

We delivered run rate revenue of 135 million. Our ARR was 120 million, growth of 16% year-on-year total and growth of 7% on a pro forma basis. We expect ARR to continue to ramp through the year as it usually does in Q3 and Q4 as per the seasonal buying cycles of our business. Our net revenue retention was 98%.

Jon will provide details on all our Q2 financials and KPIs, as well as our outlook for the second half, which as many of you know, is seasonally our strongest new booking, renewal, and revenue quarters. He will also walk you through our guidance for accelerating adjusted EBITDA profitability in Q3. Overall, our revenue growth rate and our net revenue retention rate remained strong and trend higher than most other information services companies given the mission-critical solutions we deliver for our customers, our ability to continuously innovate our proven recurring revenue model, and our successful cross-sell and upsell strategies. And we are reaching adjusted EBITDA profitability ahead of schedule.

As we look to the full year, we provided guidance for 2023 GAAP revenue to be 136 million to 138 million, representing 20% to 21% year-over-year growth, consistent with the range of previously provided guidance with a more narrow range to reflect the increased visibility on the second half of the year. We also expect run rate revenue of 143 million to 150 million for the year, an updated range driven in part to the company's decision to sunset revenue for select unprofitable products and take other actions to optimize long-term profitable growth. We expect ongoing adjusted EBITDA profitability growth from next quarter moving forward and over time to achieve industry-normative adjusted EBITDA and free cash flow margin in line with other information services companies in the long term. Our guidance and continued performance were driven by our compounding revenue growth, strong recurring revenue, high revenue retention, and high gross margin profile.

Now, let me touch on some favorable dynamics that serve as a backdrop for our growth in the second half and position us for accelerating growth in the long term. First is the large market opportunity we operate in and our unique position in the sector. Increasing regulatory, geopolitical, and macroeconomic and operational risks are top concerns among CEOs and leaders of government organizations alike. New regulations from the U.S.

to the EU to China often quickly extend from local to global, creating large regulatory complexity that spreads globally, particularly around issues such as semiconductors, the transition to the new energy economy, crypto assets regulations, the Data Act, and climate change legislation with significant variations in how and when each region adopts and implements these regulations. This, in turn, creates uncertainty for all organizations and significant top-line and bottom-line impact for companies that operate globally. Without FiscalNote, organizations face a manual, complex, and expensive and inefficient process for tracking, assessing, and taking action on regulations and geopolitical issues. We believe that this remains a large global market opportunity.

We spent the last decade applying proprietary AI expertise to structure, normalize, analyze, and digitize vast amounts of regulatory, legal, macroeconomic, and geopolitical information and to embed workflows to make data useful and actionable for our customers. This forms the basis of our market leadership position and is the underpinning of our durable growth strategy. As we said, we serve three primary groups of customers, government organizations, corporate enterprises, and nongovernment associations. Among these large enterprises have been our largest, fastest-growing customer base.

Our large enterprise and strategic accounts deliver NRR rates well above our company average and more closely aligned with market-leading software companies. Here, we have a strong record of land-and-expand growth as we add new data sets, products, and users across the customer's organization. From a large energy company who's extending their physical coverage across 50 states into additional priority global markets, to a new opportunity with a large healthcare company that is evaluating our premium global policy dashboard offering to our ongoing expansion with a large e-commerce company, who is using FiscalNote to monitor policy changes across 40 countries and are now adding new-issue areas. All of these are exciting growth opportunities in our large enterprise customer base.

Of course, this strong mid-teens organic growth from large enterprises is supplemented by our solid base of revenue from foreign and U.S.-based government organizations, as well as nongovernment associations where we have many relationships dating back decades from some of our acquisitions. All of this reflects our ongoing success as a compounding growth company with a broad and diverse customer base against the backdrop of increasing global complexity and uncertainty that we believe only FiscalNote can address with our unique and proprietary products and data sets. Additionally, FiscalNote is constantly searching for new customer segments that drive growth as well. As an example, the European market stands at one of our most regulated markets in the planet, and yet only 14% of revenue comes from this market.

We are at the beginning stages of our European expansion. And I believe that similar to other large-scale information services leaders, we can build a business that can rival the size of our North American business with just our current products today. This brings me to our second area of growth, new AI products and solutions. We are introducing a series of new products that create clear upside for our land-and-expand opportunity, not just within enterprise accounts, but also our large government customers.

The first is Risk Connector, a new internally developed risk intelligence solution that enables enterprises to reveal operational, relational, and reputational risk. Risk Connector brings the power of our proprietary data and AI capabilities, not relationships, and identify risks within an organization supply chain, as well as the organization's customers, investors, partners, and any other vectors through which a risk can materialize. This empowers large organizations in the private and public sectors to anticipate, understand, quantify, and track risks emanating from their operations and their full level of relationships in a way that current solutions cannot. Only a few weeks after public launch, we already have several active proposals in market with large enterprises.

We are delighted with the early momentum of this new product, which exemplifies our AI leadership and our unrelenting commitment to innovation that delivers customer value. We are accelerating our AI leadership in other ways as well. In addition to our recent partnerships with OpenAI and Bard by Google, in Q2, we established collaboration with Microsoft to develop the plug-in for Microsoft's new AI-powered Bing. This enables Bing customers to access select FiscalNote data sets and content.

Like other partnerships and collaboration, this enables FiscalNote to capture critical insights and how users engage generative models, understand political and regulatory information, which in turn allows us to bring new value to our customers who trust and have confidence that FiscalNote data and information as a critical component of their operations. Our integration with large-language model providers like Microsoft and Google complements and extend our own proprietary AI, which has been a cornerstone of our business for over the past decade. One of the most recent AI advances is FiscalNoteGPT, which we developed internally. FiscalNoteGPT was built leveraging the decade-long investment in AI, ML, and MLP in the legal industry, drawing on the company's existing operations in data ingestion, collection, cleansing, and curation to pull an extensive archive and legal and regulatory data sets from around the world.

Despite major advances in AI and the use of large-language models in the technology industry, further domain-specific systems are needed to advance the use cases of these models into industry domains. FiscalNote has developed a domain-specific approach to FiscalNoteGPT to specifically address the unique complexity that exists in the legal and regulatory world and believe that as it further develops FiscalNoteGPT, they will become critical for customers across legal policy and regulatory industry with the application of development into the broader industry. Among its initial capabilities, FiscalNote assists 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 thousands of current and updated databases, which facilitate access to the company's comprehensive data and insights on content. FiscalNote plans to incorporate FiscalNoteGPT into its continuous innovation road map to support customers and deliver new AI-driven capabilities in its workflow and data solutions.

In addition to assisting FiscalNote's core products and improving the experience of existing FiscalNote customers, such as question-answer systems, summarization, and sentiment analysis, FiscalNote plans to leverage FiscalNoteGPT for key partnerships with other legal and regulatory data and software companies and find new revenue streams via APIs to advance the use of its models in the broader industry and by unlocking the full power of its data and AI. FiscalNoteGPT represents a major advancement to leverage its domain-specific data set to adapt and train a large language model for the legal and regulatory world. As we look at the depth and breadth of our AI leadership, opportunities for growth have never been more clear from new market expansion opportunities like Risk Connector to our selection as a partner for the world's most prominent AI company to our own FiscalNoteGPT products. Our broad and deep AI expertise and legal policy regulatory data is advancing our leadership position and providing incremental new growth opportunities.

As a result, FiscalNote is now positioned better than ever and better than anyone to build a category creator which consistently innovates to turn insights into actions, convert challenges and opportunities, and mitigate risk to protect operations. Finally, I want to touch on our go-to-market strategy and organization. Under the leadership of our new chief revenue officer who joined us at the beginning of the year, we have conducted a deep analysis of our go-to-market strategy. Over the past few months, we have aligned our sales teams to ensure we are focusing our efforts in allocating talent to capitalize on our highest growth products, our most productive sales talent, and our strongest growth sectors.

Our newly formed strategic accounts team is already generating a number of new large-scale opportunities with significant potential. We have developed premium offerings, which are now contributing to the pipeline. We are building new partnerships that will help us secure large-scale, multiyear government relationships that could be transformative to our growth. While we have chosen to execute on the sales realignment rapidly and as these changes take root, they position us well for profitable, mid-teens organic growth year after year.

Similarly, we are also making some strategic decisions around which products and offerings have the greatest potential for long-term profitable growth and, in some cases, making hard decisions around products we feel are not representative of the growth and profitability that we expect. We have been dynamic in our allocation of capital, including a sunsetting of our underperforming products, and we have adapted our expectations for 2023 run rate revenue accordingly. We believe that with our new product development capabilities, AI leadership and sales realignment, the long-term opportunity we are creating for ourselves outweighs any near-term impact. Like all great market leaders, we need to remain steadfast in our strategy, innovate for our future growth to make decisions that ensure we are allocating capital and resources to the highest, most profitable growth opportunities in the long term.

In sum, as leaders, we are constantly innovating our new customer segments, new product lines, and new offerings, so we can expand the value we deliver to our thousands of customers each day. We enter the second half with a strongly aligned sales team that is positioned to capitalize on our growth potential. We continue to deliver compounding durable recurring revenue. We are positioning the company for reaccelerating growth and industry-normative profit margins in the long term.

Before I turn it over to Jon, let me put a finer point on our accelerating adjusted EBITDA profitability. As a leadership team, we are highly focused on deploying the right operating model and cost structure to position the business for long-term profitable, durable growth. The cost realign program we outlined in our last call is starting to take shape. Our sales and marketing teams are now aligned and support growth.

Our G&A is built with opportunity for efficiencies. Our R&D expenses are benefiting from our unique and defensible AI, which results in faster time to market and more efficient product innovation. We continue to execute on our cost actions that allow us to optimize our operating model and reduce our cost structure. This is enabling us to pull forward our profitability goals and achieve adjusted-EBITDA profitability in Q3, a quarter earlier than anticipated.

And based on our guidance for Q4, we will exit the year with adjusted EBITDA margins at or approaching double digits, a remarkable improvement from when we enter 2023. I am proud of the hard work of the FiscalNote team that makes this milestone possible. In sum, our model is simple. We take our customers from the previous year, renew them, and upsell those customers with new products and capabilities to grow our business while simultaneously adding new customers each year.

Because of our 80% adjusted gross margin profile and our ongoing focus on opex cost management, this model also drives significant operating leverage, leading to adjusted EBITDA profitability in Q3, double-digit adjusted EBITDA margins exiting the year, and free cash flow soon thereafter. Looking ahead at scale, we expect to deliver the margin and cash flow model similar to other sector-specific leaders in information services which, on average, typically drive free cash flow margins well north of 20%. In summary, we're executing on the opportunities in front of us today, improving our compounding growth model. Our business is underpinned by a large growing macro environment of regulatory, geopolitical, macroeconomic, and operational uncertainty that continues to generate durable demand for our products.

Our foundation of recurring revenue, high adjusted gross profit margins, and strong operational leverage is allowing us to achieve adjusted EBITDA profitability earlier than expected and drive ongoing profit growth moving forward. We have aligned our sales teams and operational structure to capitalize on our growth opportunity and accelerate growth in the long term. As leaders, we are 100% focused on building a durable, profitable compounding growth company that provides unique value to the world's most important decision makers and scaling this business to 200 million, 300 million, 500 million, 1 billion in recurring revenue and beyond. Now, let me turn it over to Jon for details on the financials and our outlook going forward.

Jon Slabaugh -- Chief Financial Officer

Thank you, Tim, and good morning. I'm going to spend some time providing further details on the quarter. I'll also discuss what to expect in terms of financial performance for this year. Let me start with revenue.

Second-quarter GAAP revenue was $32.8 million, marking year-over-year growth of 21%. On an organic basis, GAAP revenue grew 10% year over year and 8% on a non-GAAP basis after excluding the deferred revenue adjustment impacting 2022. We continue to deliver solid organic growth complemented by accretive strategic tuck-in acquisitions. This has been our track record, and we expect to continue this revenue performance moving forward.

Second-quarter subscription revenue, which makes up 90% of our total revenue, was $29.5 million. This is an increase of 21% from a year ago and 9% on an organic basis, excluding the noncash deferred revenue adjustment in 2022, once again, showing our strong recurring revenue model. Our advisory and other revenue was $3.4 million, a $500,000 increase year over year. We exited Q2 with run rate revenue of $135 million in total, marking 17% year-over-year growth.

Run rate revenue is defined as ARR plus nonsubscription revenue earned during the past 12 months. It is a key management metric and serves as a baseline for subsequent quarters and beyond. On an organic basis, run rate revenue was $126 million, reflecting 6% growth on a pro forma basis as defined in our press release. NRR, or net revenue retention, for the quarter is approximately 98%.

As we've said, NRR rates are highest among larger enterprise accounts. Enterprise and strategic accounts now represent our largest, fastest-growing, highest retention customer group. We have recently taken steps to allocate more sales and marketing resources to large strategic accounts and expect this to drive increasing total NRR. We grew total annual recurring revenue, or ARR, to $120 million as of June 30th, an increase of 16% compared to the same period in 2022.

Organic ARR as defined was $113 million as of quarter-end. This represents a 6% growth rate when compared to our ARR in Q2 of last year on a pro forma basis. As we've said, we anticipate that most ARR growth will take place in the second half of the year, reflecting our usual seasonality. Looking at gross profit, we continue to enjoy strong margins.

Our Q2 gross profit was $23.4 million, representing a 71% margin. Our second-quarter non-GAAP adjusted gross profit was $26.4 million representing an 80% gross profit margin after adjusting for amortization. Our adjusted gross profit margins remained consistently high in the 80% range quarter after quarter. Total operating expenses, excluding the cost of revenue, grew approximately $4.6 million year over year, excluding noncash stock-based compensation expenses.

Of that, acquisitions accounted for approximately $2 million of a year-over-year increase. Sequentially from last quarter, total operating expenses declined about $2 million excluding noncash stock-based compensation and other noncash expenses. Within opex, sales and marketing costs were $11.7 million for the quarter, an increase of $1.3 million year over year, largely due to acquisitions, but a decrease of $600,000 from last quarter as we realigned the sales structure, as Tim referenced. R&D expenses were $4.5 million, a $700,000 increase from last year, but a reduction of about $600,000 from Q1 due in part to increased efficiencies.

Editorial costs were approximately $4.8 million, a $1.4 million increase year over year, partially driven by acquisitions and relatively flat from last quarter. G&A expenses for the quarter were $16.2 million, an increase of $6 million from a year ago, largely driven by an increase in noncash stock-based comp expense of approximately $4 million. Excluding noncash stock-based comp, G&A was approximately $11.6 million, an increase of about $2 million year over year, largely due to public company costs. Looking sequentially from Q1, G&A declined by almost $1 million, reflecting some benefit from our cost reduction plans, Q1 expense seasonality and lower stock-based comp expense.

The operating loss for Q1 was $17 million in total. This includes $6 million of stock-based comp. Our total interest expense is $7.2 million, of which cash interest expense was $5.2 million, which is a good proxy for our quarterly cash interest expense going forward depending on rates. We also recorded a noncash loss of $3.5 million related to our exchange agreement with GPO, a pre-listing Note holder.

In this agreement, we canceled a number of shares held by GPO exchange for issuing a new note under the terms previously disclosed. The GAAP net loss for Q2 was $30.9 million, which is reconciled to our adjusted EBITDA loss of $4.3 million in our press release. Our balance sheet remains solid with $38.1 million of cash and cash equivalents as of June 30th. We have sufficient capital to fund operations and support our growth initiatives.

Our operating expense reduction plan is driving $9 million to $10 million of in-year cost savings in 2023 and annualized savings of $18 million to $20 million. These actions helped to improve our adjusted EBITDA in Q2. Given our positive trajectory, we have pulled forward our profitability goal. FiscalNote will now reach the inflection point of adjusted EBITDA profitability in Q3, one quarter ahead of previous guidance.

This brings me to our guidance. For Q3, we expect revenue of $34 million to $35 million, and we expect positive adjusted EBITDA of $200,000 to $1 million. This is an improvement over our prior guidance to be roughly breakeven in Q3. For the full year, we are providing guidance, including GAAP revenue of $136 million to $138 million, marking growth of 20% to 21% year over year, including the acquisition of Dragonfly.

This is consistent with our prior range and more narrow to reflect our current visibility. Run rate revenue of $143 million to $150 million, representing growth of 13% to 18% into 2022, inclusive of Dragonfly. This is a slightly lower range than previously provided due to our decision to sunset unprofitable products that are not achieving sufficient revenue conversion to merit continued investment and the short-term impact of a decision to realign the sales team for greater efficiency and increased focus on large enterprises. Ultimately, these decisions position the company to accelerate long-term profitable growth.

We expect adjusted gross margins to continue at approximately 80%, a full-year adjusted EBITDA loss between $8 million and $6 million. As Tim mentioned, our year-end guidance implies a positive adjusted EBITDA margin of 7% to 12% in the fourth quarter, a remarkable improvement from the first quarter. We look forward to reporting these results early in 2024 as we continue to deliver strong 80% adjusted gross profit margins, leverage the operating platform we have in place, and continue to manage our costs. We expect to drive strong conversion of incremental revenue to adjusted EBITDA.

As we reach the inflection point of adjusted EBITDA profitability, operating leverage will enable us to deliver positive free cash flow margins in the coming quarters. Our lenders remain flexible and are supportive of the company's focused strategic acquisition program. We have approximately $94 million of debt capacity subject to certain conditions. We will continue to pursue selective M&A opportunities that are accretive to growth and profitability.

And of course, given our stock price, we are focused on transaction structures heavily weighted to earn-outs and structured stock consideration with terms that give long-term upside with minimal dilution. In closing, management continues to deliver compounding top-line growth as we drive to become a profitable business providing mission-critical solutions to the world's most important decision makers. There are secular trends propelling our business and creating sustainable demand. We continue to leverage our investments in AI to drive new growth opportunities and drive efficiencies throughout the organization.

With recurring revenue, strong adjusted gross margins, and ongoing cost management, we are pulling forward our adjusted EBITDA expectations and now expect to be adjusted EBITDA profitable in Q3, a quarter earlier than expected. And we have the operational structure and capital to scale FiscalNote and drive long-term value. With that, I will now open up the call to questions. Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] And we will pause for just a moment to compile the Q&A roster. And we will take our first question from Mike Latimore with Northland Capital Markets. Your line is open.

Mike Latimore -- Northland Securities -- Analyst

Great. Thanks a lot. Yeah. Congrats on the strong results and outlook here.

As you look to the second half of the year here, bookings obviously tend to be higher than first half. I guess, the pipeline coverage relative to your expectations, how is that looking? How does it compare to prior years?

Jon Slabaugh -- Chief Financial Officer

Hi, Mike. It's Jon Slabaugh. Thanks for the question. Regarding pipeline, I've got Josh Resnik here.

And he works closely with [Inaudible], and I'll let him take that question.

Josh Resnik -- President and Chief Operating Officer

Yeah. Hey, Mike, thanks for the question. So, yes, pipeline so far into Q3 is looking promising. We -- as we've talked about -- we've made some changes in the sales organization, which we think are going to be driving higher productivity, both in terms of how the teams work and in terms of the sectors that we focused on.

So, right now, we're feeling good about where we're headed for the second half.

Mike Latimore -- Northland Securities -- Analyst

Great. And within that pipeline, maybe you can you talk a little bit about the vertical mix. Is it -- does it look more like enterprise here, commercial versus government? And then also anything more skewed to new logos versus upsells?

Josh Resnik -- President and Chief Operating Officer

Yeah. So, it's a balance of private sector and public sector -- enterprise and public sector. We are -- in a macro environment like this, it's always a little more challenging on the new logo side as compared with retention. But we're seeing -- but we're still seeing, all things considered, some good growth on the new logo side.

And sorry, Mike, I may have lost track. What was the rest of your question?

Mike Latimore -- Northland Securities -- Analyst

Just wondering if the pipeline mix of new logo versus upsells has changed relative to, say, prior years.

Josh Resnik -- President and Chief Operating Officer

No. I mean, it's relatively steady compared to prior years. So, like I said, in this macro, new logo is always going to be a little harder than retention, but it's relatively consistent.

Mike Latimore -- Northland Securities -- Analyst

And then just on the Risk Connector, very interesting launch. How is the pipeline looking for that? What kind of deal sizes are you seeing? What kind of verticals are interested?

Josh Resnik -- President and Chief Operating Officer

Yes. So, we're actually seeing good pipeline build there and a pretty broad pipeline. It's -- the product is applicable across industries. So, we're feeling good about where that's going.

And we expect deal sizes to be relatively large compared to our average ACV. We've got multiple pricing tiers in play but generally expect a lot of these deals to be six figures.

Tim Hwang -- Co-Founder, Chairman, and Chief Executive Officer

Hey, Mike. [Inaudible] Just to kind of jump in with your -- going back to your last question. We kind of alluded to this in the earnings kind of script earlier on the call, but we are seeing very good traction with our largest enterprises. And a lot of that is being driven by our NRR rates in that large enterprise group.

So, we're talking Fortune 100, Fortune 500 businesses that are seeing quite a large amount of expansion by adding new data sets, adding new kind of capabilities onto our platform. And so, even in just Q2, we saw a pretty large expansionary wins pretty much across the board in retail, manufacturing, energy, healthcare, and other sectors. So, as those large enterprise customers to continue to compound and add new capabilities, we could expect that, over time, a larger mix of our underlying revenue should be coming from those larger businesses overall.

Mike Latimore -- Northland Securities -- Analyst

All right, makes sense. Thank you.

Operator

We will take our next question from Richard Baldry with ROTH MKM. Your line is open. 

Rich Baldry -- ROTH MKM -- Analyst

Thanks. Can you maybe talk a little bit about on the AI side? I guess the odd question where people say, well, won't AI make what they do easier at FiscalNote. And I think the obvious -- the answer is no, but I think hearing it from you will probably help alleviate any confusion around that.

Tim Hwang -- Co-Founder, Chairman, and Chief Executive Officer

Yeah. Yes. So, the way we think about it is two fronts, right? So, can we automate some of the things that we're doing already within our operating expenses using AI? And so there are areas, for instance, in customer acquisition or in data acquisition, things like that, where we're retooling some of our internal kind of capabilities. Specifically within R&D, I think that we have seen our market leadership extend ourselves largely because of the partnerships we've executed with OpenAI's ChatGPT, Google Bard, Microsoft Bing, and so on and so forth.

And those things sort of enable us to be able to reduce our R&D expenses by sharing the load with these large-language models and the like. And so, that's why you're seeing this reduction in R&D expense relative to operating expenses. Now, those are also obviously nice to have some things and obviously drive some level of profitability. But at the end of the day, we need to build a great business, and a great business is determined by having a great product.

And so, for us, that -- you can sort of see that in, for instance, the launch of FiscalNoteGPT, where we're combining all of our data, the decade-long investment that we have in legal and regulatory information, and then the ability to be able to kind of combine that with our own language models to be able to create things like question-and-answer systems, summarization capabilities, and other things that are unlocking new capabilities overall. So, it is this combination of sort of reducing operating expenses and also creating new capabilities that I think are just unparalleled in terms of the ability to be able to create these types of capabilities overall.

Rich Baldry -- ROTH MKM -- Analyst

And can you talk about whether this rapidly emerging AI segment -- it's a lot of technology shifts going on. Do you think it's causing any confusion that's slowing sales cycle? Or do you think it's just broadening the sales pipeline, like people are sort of more interested now in these types of solutions?

Tim Hwang -- Co-Founder, Chairman, and Chief Executive Officer

I think that we are adding value to the customers that we have today and also expanding what we are capable of doing to new customers, right? So, our existing customers are going to benefit from these new capabilities, right, the ability to provide summaries and create automated insights and things like that. The ability, for instance, to pull up a Word document and automatically populate the entire summary of regulatory context immediately. But at the same time, these capabilities are also enabling us to create new products. So, Risk Connector is a great example.

FiscalNote, we've historically have not played in the supply chain analytics and software market. And now, we are because we can leverage the data that we have, create new software, and enter the market kind of supporting a new buyer within the enterprise, folks who focus on sustainability, focused on supply chain risk, and so on and so forth. And so, it's this combination of AI-driven innovation that drives new total addressable market, that drives really a new revenue opportunity for us overall.

Rich Baldry -- ROTH MKM -- Analyst

And you called out the sort of mismatch between how overregulated Europe maybe versus the contribution to revenue. So, how do you feel about your international sales capacities, the headcount efficiencies they've gotten up to the reach they've got? And do you think you're -- even being careful on costs, you'd be adding over there? Thanks.

Tim Hwang -- Co-Founder, Chairman, and Chief Executive Officer

We are definitely in the early stages of growth in Europe and Asia. And I'll let Josh kind of compound on this a little bit. But as I mentioned, 13%, 14% of our revenue today comes from the European market. Substantially lower portion of that comes from Asia.

We are expanding definitely in each of the country markets in the European market. Obviously, we are in the early stages, and so we're still building infrastructure and capacity, but we're doing it in a very thoughtful way that drives sustainable compounding growth and enables us to sort of build that long-term infrastructure. But I don't know, Josh, if there's anything else you wanted to have in your end.

Jon Slabaugh -- Chief Financial Officer

Yes. Sure, Tim. I can just add that generally speaking, we are seeing strong demand for our products in Europe and Asia. We see a lot of opportunity for growth there, both organically and inorganically over time.

We have strong bases of operations in both areas. We have offices throughout Europe and Asia, including Korea, Singapore, Australia. And so, we see a lot of opportunity there, and we expect to take advantage of that in a very strong way.

Rich Baldry -- ROTH MKM -- Analyst

Great, thanks. And congrats on the profitability improvement.

Operator

We will take our next question from Matthew VanVliet with BTIG. Your line is open.

Matt VanVliet -- BTIG -- Analyst

Yeah, thanks. Appreciate the time this morning. Just maybe one more on a little bit of additional commentary on the AI front. Obviously, it's been embedded in the platform in a number of ways and is really sort of the engine that drives all this.

But as you look at something like FiscalNoteGPT, do you expect to have more sort of directly generative AI or other AI-focused products to delineate the fact that this is a way to monetize something you have tremendous expertise in? We see the partnerships with Google and OpenAI. Or is this kind of the extent of what you'd expect on a product road map and really is kind of leaning into just further embedding it in more functionality across the existing customer -- or the product portfolio?

Tim Hwang -- Co-Founder, Chairman, and Chief Executive Officer

Yeah. So, just to touch base a little bit on that FiscalNoteGPT point. So, we're very excited by FiscalNoteGPT. It's the first proprietary platform incorporating generative AI and large-language models for legislative, statutory, regulatory, and policy information.

And like other generative AI systems, the interaction with customers are such that it enables them to identify emerging concerns or generate new insights, summarize timely issues. We view these things in the long term as table stakes. They need to be embedded in our platforms because customers are going to expect it. I do think that FiscalNoteGPT is an interesting opportunity in the sense that it is a platform in and of itself.

And so the ability, for instance, to leverage our language models, for instance, in partnership with other software companies. For them to be able to leverage our APIs, for them to build the applications on top of it, those are all new capabilities and new revenue streams that we see in the mid to long term. And so, it's not just the platform that we're -- and the applications that we're delivering for our customers, but what we're doing with this product launch essentially is creating a new technology platform around the legal and regulatory capability for other partners and ecosystem to kind of participate in overall.

Matt VanVliet -- BTIG -- Analyst

OK. Very helpful. And then as you look at the products, you talked about sunsetting. Any specifics you can share around which products? Or maybe more importantly, kind of what the exact revenue impact is this year versus the previous plan? And maybe more importantly, how does this impact growth -- or how much of a headwind to growth does it present in fiscal '24, understanding that focusing resources is key here, but just kind of wanting to make sure we're adjusting our forward models appropriately?

Tim Hwang -- Co-Founder, Chairman, and Chief Executive Officer

Yeah. So, I'll kind of start off, and then I'll pass over to Jon and Josh here. But what I would say philosophically is that at our company, we look at every single product line and line it up against gross margin, EBITDA impact growth potential, and then we dynamically allocate capital. So, in our case, mostly people and technology resources against the products that grow the fastest and have the most profitability potential.

So, from time to time, what we're going to do is we're obviously going to reallocate capital into things that we're seeing are growing faster in the market. So, for instance, if we saw Risk Connector was growing very, very quickly, we pull sales and marketing R&D resources off of a different product and throw it into Risk Connector to try and drive more growth and more profitability. And so, we do have a high degree of visibility on GAAP revenues for -- on an ongoing basis, and that's largely because of the way that we recognize revenue. But sunsetting different product lines or allocating capital in different product lines will probably create some level of variability on run rate revenue, largely because of the way that we kind of recognize ARR and the like.

And so, I do think that we are going to continue to be very dynamic. But as we said before, the focus that we've had on profitability override everything at the current moment as we kind of -- we're trying to drive that double-digit EBITDA margin -- adjusted EBITDA margin [Inaudible] into the future. But I don't know, Josh, Jon, do you want to add anything else on your end?

Jon Slabaugh -- Chief Financial Officer

Sure. I'll put a little bit of a finer point on it. We made the disclosures around the impairment charge we took on equilibrium ESG product. We feel like our ESG portfolio is strong and still think that's a growth area for the business long term, but that benchmarking tool just didn't have the traction that we wanted to see.

So, we decided to kind of focus in other areas. That will have an impact, which is partially a contributor to why we narrowed the run rate revenue range for the end of the year. But ultimately, we feel like the realignment of the sales force, generally focusing on large enterprise, will make up for that and more as we drive forward and get back into kind of the long-term growth profile that we want to see.

Matt VanVliet -- BTIG -- Analyst

All right. Great. Thank you.

Operator

We will take our next question from Rudy Kessinger with D.A. Davidson. Your line is open.

Rudy Kessinger -- D.A. Davidson -- Analyst

Great. Thank you. I want to dig into the assumptions in the guide in the second half. What are you assuming as far as close rates and sales productivity? Are you assuming improvement on metrics such as that? It's just that the guide continues to look fairly aggressive in terms of showing an acceleration in growth on a year-over-year basis.

You're about the only public software company that I'm aware of that's guiding to that in the second half of this year.

Jon Slabaugh -- Chief Financial Officer

Thanks, Rudy. And what I'll say is we look closely at prior years as precedent to determine kind of what we expect the close rates to be in the third and fourth quarters, we've put forward a range based on kind of the midpoint of what we saw in the prior two years and feel like the pipeline coverage, as Josh talked about, kind of validate those assumptions and monitor closely as we go forward.

Rudy Kessinger -- D.A. Davidson -- Analyst

OK. And then just on cash flow or cash burn in the second half. How should we think about that relative to you be got about 10.5 million in cash interest expense in the second half? Or maybe put differently, where do you envision your cash balance bottoming?

Jon Slabaugh -- Chief Financial Officer

The seasonality of the cash is such that kind of the end of December is the low point, we have significant collections in the first quarter, and we see that kind of being no different this year. I don't -- we're looking at cash models pretty closely but haven't really provided any kind of specific guidance around the cash balance at the end of the year. But feel like it's certainly adequate to meet all the requirements we have, provide a level of safety and securities we operate going forward, and will continue to rebuild in Q1 of next year. Obviously, as part of this, our filings, we look closely at go-forward cash positions and comfortable where we stand.

Rudy Kessinger -- D.A. Davidson -- Analyst

Got it. Thank you. That's it for me.

Operator

[Operator instructions] And we will take our next question from Mike Albanese with E.F. Hutton. Your line is open.

Mike Albanese -- E.F. Hutton -- Analyst

Yes. Thanks for taking my question. Just kind of want to build off the last regarding cash, cash burn, and then this kind of relates to, I guess, the product pipeline as well. But obviously, you've launched a number of new products, new partnerships, some additional patent wins.

Essentially, you're continually innovating. I mean, what can you tell us as that relates to kind of your capital expenditure and R&D moving forward? And maybe you can give us a little bit more color on your expectations into the back half of the year into 2024.

Jon Slabaugh -- Chief Financial Officer

So, our cash capital expenses have been running kind of in the neighborhood of $2 million per quarter. We don't really foresee that increasing and may actually kind of remain flat or decrease a little bit over time. We are capstoning a number of kind of internal projects that we've been working on over the last 18 months. I feel like, as we bring those to market, the expenses will begin to kind of come down.

Obviously, we've given some guidance around the interest -- cash interest expense as well. Other than that, those are kind of the two big ones. And then as a source of cash, we look at growing subscription income as source of additional cash as deferred revenue balances continue to increase. Is that --

Mike Albanese -- E.F. Hutton -- Analyst

Got it. OK. Thank you.

Jon Slabaugh -- Chief Financial Officer

Is that what you were looking for, Mike?

Mike Albanese -- E.F. Hutton -- Analyst

Yeah, that's helpful. And then just lastly, and this is more of a general question here. Obviously, you moved up your expectations of profitability or at least on an adjusted EBITDA basis by a quarter. It seems like the cost-cutting initiatives have been going well.

I mean, any general takeaways or any major learnings that you got a chance to really take a look under the hood over the last few quarters here?

Jon Slabaugh -- Chief Financial Officer

I'll let Josh really dig into the details there, but I think it's been a good process for us to go through. It gave us an opportunity to kind of look through the multiple acquisitions we did for ways to bring efficiency to the organization. We also focused on some of the legacy operations and ways to integrate more seamlessly. And we'll continue to do that going forward.

Josh, I don't if you want to add on to that.

Josh Resnik -- President and Chief Operating Officer

Yes. Sure, Jon. Yes. So, Mike, I mean it's really been a top-to-bottom review of our entire organization and all our operations.

And as Tim said before, it's about a realignment around sustainable and profitable growth. And so, it's been a matter of shifting resources to areas of highest potential. Enterprise being a core segment for us, but also the new products that we've launched like Risk Connector. And then being willing to very quickly and decisively make decisions on other products that aren't in line with that profitable growth profile that we're seeking.

We've made changes throughout in terms of how the teams operate, leveraging technology and AI to operate more efficiently, realigning teams, and really shifting our entire operational model throughout. And I think that it is providing us with a better platform for growth for the future in addition to driving that profitability.

Mike Albanese -- E.F. Hutton -- Analyst

Got it. Well, thank you for taking my questions, and congrats on on a nice quarter.

Jon Slabaugh -- Chief Financial Officer

Thank you.

Operator

And we will take our final question from Zach Cummins with B. Riley Securities. Your line is open.

Zach Cummins -- B. Riley Financial -- Analyst

Yeah, thanks. Good morning. Thanks for taking my questions. Can you just build a little bit more upon kind of the reallocation of resources within the sales force? Kind of what were really some of the key changes that you made in terms of go-to-market approach and kind of what you've been seeing from those incremental changes here in the last couple of months?

Josh Resnik -- President and Chief Operating Officer

Sure. This is Josh. I can take that. So, as we've discussed, a lot of shift to enterprise.

So, adding a new strategic accounts team to go after the largest accounts, shifting some resources away from smaller accounts like SMB. We have realigned our account management and customer success teams to better drive retention and upsell cross-sell. We have been much more rigorous in performance management and optimizing headcount throughout the organization. We've also focused a lot on improved sales operations and sales enablement -- so, having that kind of operational engine behind it, being really fine-tuned to be able to drive the entirety of the organization forward and having our new chief revenue officer, Richard Henderson, come in and establish a really strong leadership over the organization and a real direction toward scaling the profitable growth that we've talked about.

And I'll add to -- while we've gone through a significant amount of change already, we still have initiatives underway around optimizing things like pricing, bundling, and packaging the products to even further drive growth and further drive that upsell and cross-sell, continuing to improve our efforts on account management, customer success, and then leaning further into things like partnership strategy, which Tim spoke about earlier, and we've talked about previously with things like our relationship with Peraton. We're already seeing some traction. And continuing to go further into partnerships as well.

Zach Cummins -- B. Riley Financial -- Analyst

Understood. And final question for me really is just around kind of overall customer sentiment. I mean, have you seen any material change in terms of buying patterns from especially kind of your enterprise customers and government agencies here in the last couple of months maybe versus what you saw at the beginning of this year, end of last year?

Josh Resnik -- President and Chief Operating Officer

Yes. I would say that in terms of what we've seen in terms of sentiment, I would say, on the enterprise side, in particular, we continue to see -- consistent with what we've talked about in past quarters, we've continued to see some budget challenges and some elongated sales cycles for that reason. Overall, we're seeing a lot of strength and resilience in our core policy products and in our community offerings. We're seeing strong demand for our security intelligence out of Dragonfly.

A lot of interest, as I mentioned before, across the board, across sectors in Risk Connector. So, we're seeing large enterprises are having increasing concerns about vulnerabilities in their supply chains and the risk associated with it. And I'd say we're also seeing enterprises turn to us for combined intelligence that we can offer around geopolitical, macroeconomic, and security issues because those are all intertwined for a large enterprise. And so, we have clients who are focused on -- we have a large Fortune 500 global manufacturer who's been concerned about tensions with China and Taiwan, and so, looking at related policy implications, potential impacts from sanctions and tariffs, and looking for a macroeconomic view as to other regions where they can invest now to offset negative impacts.

So, bottom line is we are seeing large enterprises with a lot of concerns about what's happening globally and trying to make plans for how they can continue their growth paths going forward.

Zach Cummins -- B. Riley Financial -- Analyst

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

Josh Resnik -- President and Chief Operating Officer

Thank you.

Operator

And there are no further questions at this time. I will now turn the call back to Mr. Tim Hwang for closing remarks.

Tim Hwang -- Co-Founder, Chairman, and Chief Executive Officer

Great. Thank you, everybody, for jumping on the call here. And we look forward to continuing to execute on our plan, delivering on profitability and just growing a long-term growth company business. Appreciate the time.

Thank you, everybody.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Sara Buda -- Vice President, Investor Relations

Tim Hwang -- Co-Founder, Chairman, and Chief Executive Officer

Jon Slabaugh -- Chief Financial Officer

Mike Latimore -- Northland Securities -- Analyst

Josh Resnik -- President and Chief Operating Officer

Rich Baldry -- ROTH MKM -- Analyst

Matt VanVliet -- BTIG -- Analyst

Rudy Kessinger -- D.A. Davidson -- Analyst

Mike Albanese -- E.F. Hutton -- Analyst

Zach Cummins -- B. Riley Financial -- Analyst

More NOTE analysis

All earnings call transcripts