FiscalNote (NOTE) Q3 2023 Earnings Call Transcript

FiscalNote (NOTE 7.87%)
Q3 2023 Earnings Call
Nov 14, 2023, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. My name is Vince, and I will be your conference operator. At this time, I would like to welcome everyone to the FiscalNote third-quarter 2023 financial results conference call. 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] I would now like to turn the conference over to Sara Buda, vice president, investor relations. Please go ahead.

Sara Buda -- Vice President, Investor Relations

Hi, everybody. Welcome to the FiscalNote Q3 2023 earnings call. During this call, we may make certain statements related to our business that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance but rather are subject to a variety of risks and uncertainties.

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

With that, I'd like to turn the call over to 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 will review our third-quarter results, which mark our first quarter of adjusted EBITDA profitability. This is a tremendous milestone for the company. A year ago, we committed to adjusted EBITDA profitability, and that is exactly what we've delivered.

In fact, we've delivered this one quarter earlier than we had originally forecast, even amid a more challenging macroeconomic environment. If you look at where we were when we began this year, we've essentially shifted our adjusted EBITDA from a minus-7 million per quarter loss in Q1 to positive adjusted EBITDA in Q3. This is an annualized improvement of over $30 million in adjusted EBITDA as compared to where the company started this year in Q1. We have been laser focused on this milestone, and we are delighted to achieve it ahead of initial expectations.

At the same time, we have made significant advancements to accelerate our decades-long leadership in AI, aligned our sales teams on the highest-growth customers, and refined our product portfolio. Now, as we end 2023, it is time to build on the foundation and turn our focus toward accelerating growth. I'll get into the details of that growth strategy shortly. First, let me remind you of our mission here at FiscalNote and the value we bring to more than 5,000 customers every day.

At FiscalNote, we're on a mission to help our customers make sense of the complicated and constantly changing world we live in delivering a proprietary AI-enabled platform that aggregates and organizes regulatory, political, and macroeconomic information and analyze the impacts on their organization. Changes in policies, regulations, and laws impact decision-making of almost every organization around the world. Using our proprietary AI capabilities, we aggregate, synthesize, and analyze massive 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 built an enduring company for the world's most important and influential decision-makers from hundreds of government agencies and public sector customers from the Department of Defense, The White House, every member of the House and Senate in 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. Beyond large enterprises, FiscalNote serves a wide and diverse range of business customers ranging from healthcare and pharma, financial services, technology, energy, food and beverage, transportation, automotive industries, and beyond. These customers rely on FiscalNote every day to discover, process, and navigate the impact government policymaking on their organizations and more importantly to take actions which achieve their business objectives and minimize political and economic risk. This forms the base of our durable and long-term growth.

Helping our customers analyze over $6.4 trillion of government spending and tracking the over 500,000 elected officials in the United States, along with similar policymakers around the world, is an immense digital challenge, one that requires unrivaled information about the need-to-know policies, embedded workflows to manage regulatory risks, and powerful analytics and research to understand mission-critical updates. With every global conflict, every time the United States and China get into a spat over semiconductors, and every other new tariff, sanction, regulation, and geopolitical dispute, FiscalNote's data and information are more relevant than ever to help companies and organizations navigate through an increasingly challenging complex world. This is a $37 billion market opportunity that companies spend every year trying to obtain this critical information and data. We have become an increasingly 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 fields, FiscalNote continues to deliver mission-critical information that has a direct impact on their customers operations and create an entirely new category within the data and information services space. We've invested tens of millions of dollars in almost 10 years, building a defensible combination of data, intelligence, and AI technology to collect, synthesize, and make sense of an exploding pace and volume of dynamic, unstructured regulatory, political, and legal information around the world, and the [Inaudible] tools to help our customers respond. This forms the basis of our market leadership position and is the underpinning of our durable growth strategy. Further, with our AI pedigree and our vast array of validated trusted data, we are in a unique position and of a clear competitive advantage.

We are a compounding growth company with a broad and diverse customer base against a backdrop of increasing global complexity uncertainty that we believe only FiscalNote could address with our unique proprietary products and data sets. Now, let me provide a brief summary of our Q3 results in our ongoing momentum as we reach the inflection point of adjusted-EBITDA profitability next quarter and beyond. In Q3, we delivered another strong quarter of growth with revenue of 34 million. This marks an increase of 17% year over year and is yet again consistent with the guidance we provided.

We also enjoy consistent high gross profit margins. Q3 adjusted gross profit margins were 83% in the quarter. These 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 third-quarter just EBITDA was positive $700,000, in line with the guidance we provided on the last call.

Our cash and short-term investment at the end of the quarter was $24 million. Turning to management KPIs, we delivered run rate revenue of $138 million. Our ARR was 123 million, growth of 14% year on year total and growth of 8% on a pro forma basis. Our net revenue retention increased to 100%, driven by ongoing success in our large enterprise customer base where rates continue to be well above company average.

So, now, let's turn to the nuts and bolts of the business. First, we'll review the things that are going well. Second, we'll look at the things that we need to improve on. And third, we'll discuss the pathway for the company moving forward to accelerate growth now that we've achieved profitability.

First, on the things that are going well. We are now profitable on an adjusted-EBITDA basis. For the last year, considerable management time and attention has been placed on this goal. This delivers a tremendous inflection point of delivering positive adjusted EBITDA for the first time in the company's history and one quarter earlier than initially forecast.

We enabled strong operating leverage driving 160% conversion of incremental revenue to adjusted EBITDA this quarter. To achieve this, we took a number of actions including reducing our G&A for efficiency, reducing our editorial and other expenses, shifting our R&D expenses, and making hard decisions about product spend and sunsetting underperforming unprofitable products. We made major changes in our sales team to focus on large enterprises with larger ACVs. This is proven to be the right strategy with impressive outcomes.

By shifting our R&D spend to higher-value, higher-growth products, we have reinforced our competitive moat and secured AI partnerships with market-leading organizations that recognize and accelerate the applicability of our market-leading data, intelligence, and AI. We have brought to market successful new products such as Risk Connector and FiscalNoteGPT, which are both starting to gain traction in the market. By aligning our sales team and reallocating resources to focus on large enterprise accounts with larger ACVs, we have turned large enterprise into our largest, fastest growing customer group with NRR rates well above company average, trending well above 105% on an LTM basis. And there is more upside here as we introduce new enterprise products with higher ACVs and continue to upsell and cross-sell.

By modifying our go-to-market model and reallocating sales and marketing spend, we are starting to drive growth in the areas of the business with the strongest upside potential. More importantly, by taking cost actions across our organization, we have achieved adjusted-EBITDA profitability as have initially planned and position the business for very strong conversion of incremental revenue to adjusted EBITDA profit. And ultimately, we have created a durable, profitable company with highly innovative products and a superior market leadership position. We expect the company will continue to see strong conversion of incremental growth into adjusted EBITDA in the long term.

Overall, the company spent the last decade building an operational and technical infrastructure that is poised for rapid growth. With global operations ranging from Washington, D.C. to London to Seoul and Sydney, the company has an extremely talented management team, data, technology, and AI organization, as well as a go-to-market infrastructure, to continue to grow. The changes we have made have resulted in a leaner, more disciplined organization poised for growth.

All of this is a testament to the hard work and dedication of our teams and the unparalleled value we deliver to our 5,000 customers every day. So, where do we see areas of improvement for the business then? Candidly, we are watching two data points very closely within the business. First, while we have seen great continued growth in our subscription business, we have seen some challenges in our one-time non-subscription revenue, which is typically very strong in the second half of the year. With a challenging macro and some underperformance in some few noncore products, this one-time non-subscription revenue didn't deliver on pace with our traditional seasonality.

Second, we had some slower-than-expected pipeline conversions as we shift toward larger strategic accounts which are taking longer than expected to close also due to the macroeconomic environment. While we have retooled our product strategy to go after larger, bigger accounts, launch new products and features and structure to go-to-market teams to go after these deals, under the current macroeconomic environment, these deals are receiving more scrutiny in company P&Ls. So, what is the company's plan to reignite growth and profitability now that we've achieved the inflection point of adjusted-EBITDA profitability? It is now time for us to shift our management time, focus, and attention to allocate our time to resources and capital to reaccelerating growth. This is the singular focus of the operating team, drive sustained growth within the organization as we have done for the last 10 years.

Fundamental to this growth reacceleration is a refined product strategy. This is where we drive incremental upside to the durable base of revenue that we have in place today. Let me give some context. First and foremost, we will sustain and build upon our core products with the strongest demand profiles.

Our regulatory and policy data solutions continue to be the strongest offerings in our portfolio with robust demand. Organizations are facing significant increases in regulatory complexity, and it is spreading globally, which creates uncertainty for all organizations and significant top-line and bottom-line impact for companies that operate globally as well. 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 that make data useful and actionable for our customers. Today, thousands of organizations, including those in the public sector and private sector, rely on FiscalNote's regulatory and data policy solutions.

As such, we'll continue to invest and build upon the success of these core products with new product enhancements, new data sets, and new AI workflows that reinforce our superior competitive position and bring unparalleled value to our customers. We believe there's ample opportunity to continue our land-and-expand strategy with our largest customers as we continue to upsell and cross-sell legal and regulatory data sets. Second, we will pursue adjacencies to core products and fast-growing areas of risk and compliance. This includes products such as Risk Connector, our new internally developed risk intelligence solution that enables enterprise to reveal operational, relational, and reputational risk.

Risk Connector brings the power of our proprietary data and AI capabilities to map relationships and identify risks within the organization supply chain, as well as the organization's customers, investors, partners, and any other vectors to which risk could materialize. This empowers large organizations in the private and public sectors to anticipate understand, quantify, and track risks emanating from their operations in a full web of relationships in a way that current solutions cannot. Only a few weeks after public launch, we already have our first anchor customer and several other active proposals in market with large enterprises. We 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.

Risk Connector is just one example of a product adjacency. We have additional products in development that will enable us to accelerate growth through adjacencies such as this. We also continue to pursue geographic adjacencies as well. This year, we invest in our Europe expansion both organically and through acquisition, which allows us to be able to bring new data sets to our customers.

Finally, we are investing in new generative AI capabilities for our customers with a new go-to-market strategy that we expect to result in faster revenue generation. We are placing a substantial shift in our new product strategy to focus on AI Co-pilot agents. Our first new product initiative is our FiscalNote AI Co-pilot program through which we are developing a series of AI-enabled application that provides intelligent assistance for policy and risk management professionals. The Co-pilot program leverages our decade-long investment in AI, ML, and NLP, proprietary defensible reasoning, and data aggregation tools, as well as the tens of thousands of proprietary and public verticalized data sets and comprehensive information that FiscalNote collects that provides lightweight applications with very specific use cases.

The goal of FiscalNote to launch a constellation of AI agents that include quick applications catered to our individual [Inaudible] that automate the day-to-day work of creating legislation, drafting regulatory and legal analysis, doing advocacy outreach, and conducting constituent communications and regulatory responses. In doing so, Co-pilot will reduce countless hours that our customers spend drafting legislation, responding to legislation, communicating constituents within other tasks. Delivered as a lightweight self-serve app, these copilots build on our FiscalNoteGPT generative AI platform we announced earlier this year and enable new go-to-market models with an array of FiscalNote products that are easy to sell, easy to deliver, and easy to scale across users. The value to FiscalNote customers is clear as we essentially enable both existing and prospective customers to quickly and easily leverage our AI-powered solutions to get their jobs done faster with a higher degree of confidence.

The context of this Co-pilot program is evident. Despite major advances in AI and the use of large language models in the technology industry, there is a crucial need for organizations to specifically address the unique complexity that exists in the legal and regulatory world. With our expertise in data ingestion, collection, cleansing and curation, and, of course, our extensive archive of legal and regulatory data sets from around the world, it is logical for FiscalNote to fill this void with FiscalNoteGPT and, now, our new AI Co-pilot program. Of course, FiscalNote Co-pilot complements and builds upon our integrations with large language model providers like OpenAI and Google.

With our new Co-pilot-focused AI strategy, we'll develop new go-to-market models aligned with expectations for per-user pricing. We expect that these products will be sold on a per-user basis that allows users to be able to purchase these products individually with the swipe of a credit card, substantially eliminating friction in a go-to-market process, enabling mass adoption of our generative tools, and ensuring faster revenue generation. We expect our Co-pilot strategy to begin rolling out over the next several weeks and months as we embark upon building a constellation of AI agents on top of our data. Our Co-pilot program marks yet another development in its ongoing leadership as we develop and bring to market AI-enabled solutions specifically aimed at the legal and regulatory sector.

You can expect to hear more from us in the coming weeks about FiscalNote Co-pilot and our other new product development that, over time, provide incremental growth paths to complement our proven, durable base of recurring revenue solutions. In summary, there have been a lot of changes in 2023 as we dedicated our time, energy, and resources to achieving profitability. We are now pivoting our focus to new avenues for accelerating growth in 2024 and beyond with a refined three-pronged product strategy and go-to-market strategy that will enable us to build on our core products with the highest growth potential, pursue natural adjacencies to offerings to broaden our value to customers, and develop new products with new channels for growth. This reflects our ongoing commitment to building a durable, profitable compounding growth company that provides a unique value to the world's most important decision-makers and scaling this business to 200 million, 300 million, 500 million, and a billion in recurring revenue and beyond.

Separately, you all saw the disclosure that I have informed the board of my interest in exploring and leading a going private transaction. As a result, the board has appointed a special committee to evaluate any proposed [Technical difficulty] in light of the company's strategic options in the best interest of shareholders. While I can't comment further, I will reiterate what I've said on our past calls. We have approximately $140 million in run rate revenue, a proven durable compound and recurring revenue model with more than 5,000 customers, 80% adjusted gross margins, and now have achieved adjusted EBITDA profitability.

The business has never been in a stronger position, yet our stock price does not reflect the strength of these fundamentals, and we continue to trade well below other sector-specific information services leaders. Ultimately, we will always see what is in the best interest of shareholders to achieve a valuation that recognizes and reflects the value of our fundamentals in our future growth opportunity as we build a long-term, large scale market leader in AI-driven information services. Regardless of the outcome, the entire organization will remain committed to growing our business that is delivering value for the world's most important decision-makers who trust FiscalNote to discover, process, and navigate the impact of policymaking in an organization and, more importantly, to take actions which achieve their business objectives and minimize political and economic risk. 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'll spend some time going through the details of our quarter, and then I'll walk through some of the operational changes we've made in our commitment to ongoing adjusted-EBITDA growth moving forward. Let me start with the quarter. Third-quarter GAAP revenue was $34 million, marking year-over-year growth of 17%.

Third-quarter subscription revenue which makes up approximately 90% of our total revenue was 30.1 million. This is an increase of 15% from a year ago and 7% growth on an organic basis. Excluding the noncash deferred revenue adjustment from 2022, our advisory and other revenue was $3.9 million, an increase of $1 million a year over year. We exited Q3 with run rate revenue of $138 million in total, marking 14% year-over-year growth.

On an organic basis, run rate revenue was $129 million, reflecting 7% growth on a pro forma basis as defined in our press release. NRR, or net revenue retention, for the quarter was approximately 100%, a sequential quarter increase of 200 basis points and a year-over-year increase of 100 basis points. Let me provide some more details here because it is important to see the traction among our various customer groups. As you know, we have three primary customer groups we serve, public sector, not-for-profit associations, and enterprises.

As we've said, enterprise is our largest customer group, and large enterprise and strategic accounts represent the fastest growing, highest NRR customers. And that has been the impetus for some of the changes we've made to our sales organization, to capitalize on this underlying demand and to extend our growth in large enterprises. This quarter reinforced this is the right strategy. NRR rates among our large enterprise corporate customers continue to trend above company average.

Demand for our regulatory and policy data continues to be strong, particularly among large enterprises. And with some of the recent changes we've made from product strategy to sales allocation, we see opportunities for NRR rates in this large enterprise group to expand further. Like many companies, we tend to see a bit more churn in the small enterprise space, particularly in this macro. Turning to ARR.

We grew our total annual recurring revenue, or ARR, to $123 million as of September 30th, an increase of 14% compared to the same period in 2022. Organic ARR, as as we defined, was $116 million as of quarter-end. This represents a 7% growth rate when compared to the ARR in Q3 of last year on a pro forma basis. While our ARR continues to trend up, it is slightly behind the pace we expected in Q3.

This is largely due to budget tightening and longer sales cycle as we shift toward larger enterprise customers in the midst of the current macro environment, and a few of our ancillary products are underperforming expectations. That said, the pipeline rate remains robust, and the demand for our core policy, regulatory, geopolitical, macroeconomic, security, and operational risk products continues to be strong. These products are crucial to help large enterprise customers manage global complexity and operational risk. Large enterprise continues to be our fastest growing customer group on an organic basis.

Looking at gross profit, we continue to enjoy strong margins. Our Q3 gross profit was $23.6 million, representing a 69% margin. Our third-quarter non-GAAP adjusted gross profit was $28.4 million, representing an 83% adjusted gross profit margin after adjusting for amortization. Our adjusted gross profit margins remain consistently high in the 80% range quarter after quarter.

In Q3, total operating expenses decreased by approximately $2 million year over year, excluding noncash stock based compensation expenses, cost of revenue amortization, and transaction costs. Sequentially from last quarter, total operating expenses declined by about $3.2 million, excluding noncash stock based comp and other noncash expenses. This, combined with our Q4 cost actions, means that we will realize almost $20 million of annualized opex cost savings this year. We are delivering on the cost management programs while continuing to invest in innovation and growth for the future.

Within opex, sales and marketing costs were $11.2 million for the quarter, a decrease of $600,000 year over year even after acquisitions, and a decrease of $450,000 from last quarter with our sales realignment program. R&D expenses were $4.5 million, a $1 million decrease from last year and essentially flat from last quarter. Editorial costs were approximately $4.5 million, a slight increase year over year, driven by acquisitions and a slight decrease from last quarter. G&A expenses for the quarter were $14.4 million.

Excluding noncash stock based compensation and other public company expenses, G&A was $9.5 million for the quarter. This is a decrease of about $400,000 year over year and a decrease of almost $1 million sequentially from last quarter, reflecting the favorable impact of our ongoing expense management program. The operating loss for Q3 was $13.5 million in total. This includes $6.2 million of stock based compensation.

Our total interest expense was $8 million. Of this, cash interest expense was approximately $5.4 million, which is a good proxy for our quarterly cash interest expense going forward depending on rates. You'd also note that our weighted average shares outstanding for Q3 2023 decreased by about 5.3 million shares for the last quarter and is now 129 million shares. This is related to our previous disclosed exchange agreement with GPO, a pre-listing note holder.

The GAAP net loss for Q3 was 14.5 million, and as we forecasted, adjusted EBITDA was a positive $700,000 this quarter, marking our first quarter of profitability on an adjusted-EBITDA basis, one quarter ahead of our initial guidance. We are delighted to achieve this important milestone for the company, which reflects our diligent cost management and solid top-line growth. It is important to note that, in Q3, we delivered 160 conversion of incremental revenue to adjusted EBITDA. This reflects the power of our business model.

Despite the challenging macro, we're driving strong incremental revenue through new logo acquisition cross-sell and upsell without adding incremental costs. This operating leverage is a strong indicator of what to expect as we move this company from adjusted-EBITDA positive to a free cash flow generating growth company over time. Our balance sheet remains solid with approximately $24 million of cash, cash equivalents, and short-term investments as of September 30th. We expect to increase our cash position in Q1 of 2024 through continued compounding increases to prepaid ARR and seasonally strong collections.

You see that we did file shelf registration. This is the three-year $100 million registration that simply gives us flexibility and optionality in our capital structure. This is the right time to put a shelf in place and is a common practice one year after public listing. As we committed, FiscalNote achieved positive adjusted EBITDA 12 months after our listing date and a quarter ahead of schedule and without raising additional capital.

Now, that we have achieved positive adjusted EBITDA, our operations are self-sustaining. We are now actively looking at opportunities to strengthen our balance sheet, resources that will further accelerate organic and inorganic growth. As we turn our focus to reaccelerating growth, we will have the capital structure and flexibility to invest strategically and drive our business to the next phase of growth. Now, let me comment on our guidance and how we are positioned for profitable growth next year and beyond.

For Q4, we expect revenue of $34 million to $35 million. We expect positive adjusted EBITDA of approximately $2.5 million. The swing from a $7 million adjusted-EBITDA loss in Q1 to a $2.5 million adjusted-EBITDA profit in Q4 is remarkable, particularly in light of the more challenging macro. For the full year, we expect GAAP revenue of $132 million to $133 million.

This is a reduction from our prior guidance with the majority of the impact driven by lower non-subscription one-time revenue. We expect run rate revenue of $139 million to $141 million. As Tim mentioned, we've been making a lot of changes this year to position the company for greater growth. We've realigned our sales force.

We've adapted our product strategy and sunset unprofitable products. And we've reduced our cost structure. At the same time, we've allocated capital to areas of the business with the strongest upside potential. As a result, we are well positioned as we exit the year.

Our enterprise sales team are continuing to execute well against strong demand, particularly for our regulatory and policy data. Our AI leadership is broadening our market with new partnerships in enabling us to bring breakthrough innovations to market, including Risk Connector, FiscalNoteGPT, and now, our FiscalNote Co-pilot program. We have reached the inflection point of adjusted EBITDA profitability and paved the way for free cash flow over time. With strong operating leverage, we are well positioned to drive compounding recurring revenue growth.

All of this positions us for ongoing revenue and adjusted EBITDA growth in 2024 and beyond. With that, I will now open it up to questions. Operator?

Questions & Answers:

Operator

[Operator instructions] The first question is from the line of Matt VanVliet with BTIG.

Matt VanVliet -- BTIG -- Analyst

Yeah, good morning. Thanks for taking the question. I guess first on the -- the sales opportunity, not just in the fourth quarter, but maybe as we look out into 2024. And I guess, sort of two factors there.

One, what's the -- the sales realignment doing in terms of driving more upsell, cross-sell, anything from an actual process standpoint that you've put in? And then as we think about sort of the maturity of the sales team, especially at the larger enterprise accounts, where are we in terms of sort of reps fully ramped or what's -- what's the mix of fully ramped? And then secondarily on that, where are you seeing the biggest impacts from the macro in terms of feedback from customers? And how is that impacting, I guess, either deal flow or maybe deal sizes?

Josh Resnik -- President and Chief Operating Officer

Hey, Matt. This is Josh Resnik. I can address that. So, in terms of upsell, cross-sell opportunities, part of what we've been doing with the sales realignment has been adjusting staffing responsibilities, quota setting commission plans, and such to align around upsell and cross-sell and have, in fact, established a team that is focused specifically on upsell and cross-sell because we do see significant opportunity up there, especially when it comes to large enterprise clients.

The team has gone through significant restructuring over the course of the year. We've been viewing that as an optimization of our approach to go-to-market, both in terms of how we structure the teams, but also in terms of overall the quality of the talent that we have on those teams and as well as our effectiveness, efficiency, and speed in ramping new talent as we bring talent on board and continuing to build a pipeline of talent across the board that we can use to continue as we continue our growth down the road. And in terms of the macro impact, I would say, we are still seeing strong demand for the products. We have a lot of confidence in our pipelines, including in regards to some of the new products that we've launched such as Risk Connector where we tend to see an impact really is on sale cycles and really the time to bring those home as prospects to see budget pressure internally.

Matt VanVliet -- BTIG -- Analyst

OK, very helpful. And then can you just remind us? As we look at the guidance, I think -- I think you mentioned that on the one-time that's -- that's certainly being impacted by some of the product sunsetting and winding down of the underperforming products. But can you help us in terms of what the impact is on the subscription line limiting the growth there that maybe we were previously expecting and then how that's maybe balanced with the success of the better products, especially around the regulatory and policy data? Thanks.

Josh Resnik -- President and Chief Operating Officer

Sure, Matt. So, yeah. As you noted, lower non-subscriptions one-time revenue certainly played a large role in what we're seeing. Second half is typically strong for one-time revenue, and that hasn't materialized this year due to -- largely due to budget uncertainty related to the macro.

On the ARR subscription side, we have seen some slower pipeline conversion like I was saying. And especially as we move to larger enterprise deals where the sales cycle naturally are longer, again, the macro is going to have an impact there.

Matt VanVliet -- BTIG -- Analyst

OK, great. Thank you.

Operator

Your next question comes from the line of Mike Latimore with Northland Capital Markets. Your line is open.

Mike Latimore -- Northland Securities -- Analyst

Great. Thanks very much. Good morning. Yeah, congrats on the positive EBITDA, and sequential change was pretty impressive there.

Gross margin, that seems to be at a record level and was also up sequentially. Can you just sort of describe the impacts? There was just kind of de-emphasizing some of the lower value products, you know, is this sustainable? Just little more color on gross margin would be great.

Jon Slabaugh -- Chief Financial Officer

Mike, I think the -- we can continue to see the gross margins stay pretty consistent. We saw some benefits from some credits this quarter that I don't think will be -- continue to repeat quarter over quarter. So, in terms of thinking about it going forward, at 80% adjusted gross margin numbers, probably the right way to think about it.

Mike Latimore -- Northland Securities -- Analyst

Got it. OK, great. And then on the -- just kind of some of the vertical effects here. The federal government vertical, have you seen any kind of nuances there that were unexpected?

Jon Slabaugh -- Chief Financial Officer

In terms of -- in terms of revenue?

Mike Latimore -- Northland Securities -- Analyst

Bookings primarily and [Inaudible]

Jon Slabaugh -- Chief Financial Officer

Looking at customer behavior -- Josh, you might want to handle that. But we've done -- we've done contingency planning around it as we think about guidance for the upcoming quarter. But --

Josh Resnik -- President and Chief Operating Officer

Sure, yeah.

Jon Slabaugh -- Chief Financial Officer

Go ahead.

Josh Resnik -- President and Chief Operating Officer

Sorry. Yeah, Mike. This is Josh. I would say it's -- largely continues to be steady.

Federal government tends to be a good steady revenue driver for us. We've seen some impact from budget pressures in the federal government, not surprising given the atmosphere on Capitol Hill, but still largely remained steady.

Mike Latimore -- Northland Securities -- Analyst

Got it. OK. And then the comment about this is the opportunity to kind of reaccelerate growth, is the implication there that you would try to maintain current EBITDA margins while you reaccelerate growth, or how do you think about balancing those two?

Jon Slabaugh -- Chief Financial Officer

Mike, we will continue to drive the margin. We're not giving any guidance with regards to 2024 at this time, but our -- our operating plan will continue to push the company toward a more industry-normative operating and EBITDA margin over time.

Mike Latimore -- Northland Securities -- Analyst

Got it. OK, great. Thanks very much.

Operator

Your next question comes from the line of Zach Cummins with B. Riley. Your line is open.

Zach Cummins -- B. Riley Financial -- Analyst

Yeah, thanks. Good morning, and also congrats on on the inflection of positive adjusted EBITDA in the quarter. In terms of -- I know you're not giving formal 2024 guidance, but -- but just given the updated run rate revenue outlook, is that sort of a good baseline to start from once we think about setting expectations for 2024?

Jon Slabaugh -- Chief Financial Officer

Thanks for the question, Zach. Yes, that's why we give it a run rate guidance. I think it's a good way to start your modeling for the beginning of the year and then kind of look at any updates we give further years. We see how -- how we're gaining traction or other events that would drive the number north of that level.

Zach Cummins -- B. Riley Financial -- Analyst

Got it. And in terms of the cash balance, I mean, Jon, can you give an update on are there are any one-time items impacting overall cash burn in this quarter and any sort of update you can give on expectations for cash burn in Q4?

Jon Slabaugh -- Chief Financial Officer

So, our -- interest expense and capex tend to be around $7 million per quarter. I think that's kind of when we think about beyond -- beyond the adjusted EBITDA, how to think about that. The fourth quarter tends to be the lowest point of our year in terms of cash. We're not giving specific guidance around what we think the year-end cash balance will be.

And then we begin to see very strong cash collections going into the first quarter of each year. So, we expect to see the balance kind of building back up as we move into the first quarter. But we model it. We plan around it.

The actions we've taken to date have all been done in light of cash requirements and maintaining the liquidity we need to keep the business where it needs to be.

Zach Cummins -- B. Riley Financial -- Analyst

Got it. And final question is really around, I believe you're expecting a bounce back in the cash balance in Q1 of next year. Is that assuming that you're going to start consistently generating positive cash flow from Q1 and beyond next year, or is it more of just the strong collections to start the year, and maybe it'll take a little more time to get to consistent free cash flow generation?

Jon Slabaugh -- Chief Financial Officer

So, there is a seasonality to our business where we generate significant kind of positive cash flow in the first quarter because of the amount of sales activity that takes place in the fourth quarter and the billing and the collection cycle off of that. From a -- from an income statement standpoint, we will be moving toward free cash flow from an EBITDA standpoint relative to our fixed charges -- but haven't given guidance as to when we cross over that. But it's certainly a focus of ours as we move forward to get to that level.

Zach Cummins -- B. Riley Financial -- Analyst

Understood. Well, thanks for taking my questions, and best of luck in Q4.

Jon Slabaugh -- Chief Financial Officer

Thanks.

Operator

[Operator instructions] Your next question comes from the line of Rudy Kessinger with D.A. Davidson. Your line is open.

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

Hey, guys, thanks for taking my questions. So, you know, the trend in the last few quarters has been revenue coming in below the midpoint of guidance and the forward revenue outlook being lowered. And, Jon, I know last quarter, you said you guys were assuming similar closed rates in the second half of this year as you've seen in prior years. And so, with this lowered revenue outlook, just -- could you comment specifically on your assumptions for Q4 as it relates to close rates, renewals, expansions etc.

relative to past years?

Josh Resnik -- President and Chief Operating Officer

Hey, Rudy. This is Josh. You know, I can tell you and I'll reiterate that the biggest impact came from lower non-subscription revenue, where typically, we would have expected better results seasonally in the second half. And we didn't see that come through largely due to budget uncertainty, some underperforming products.

And then on the ARR side, it's been slower pipeline conversion than we typically see. And so, like I said, as we move to larger enterprise deals, you tend to see longer sales cycles, which is -- which is fine. But we saw an impact largely due to the macro in the second half and conditions worsening in the second half.

Jon Slabaugh -- Chief Financial Officer

Sure. And, Rudy, as it relates to the guidance for the remainder of the year, we've taken into consideration the close rates that Josh had referenced and the slower pacing into that guidance. And that's why we adjusted the revenue figure down for the quarter. We've reviewed the pipeline and looked at it in light of the conversion rates that we're actually seeing.

And that's why we took the adjustment that we did.

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

OK. And then I hear -- I guess what you're saying on the Q1 cash bounce back given changes in network and capital, but with, I think, roughly 7 million a quarter in cash interest expense. I guess, just what level of annualized EBITDA do you need to get to to be free cash flow breakeven to positive on an annual basis?

Jon Slabaugh -- Chief Financial Officer

So, our cash interest tends, to be clear, is a little bit over $5 million. And then our capital expenditures are between $1 million and $2 million per quarter generally. And that's -- that's the reference to the $7 million. You could annualize that and kind of back into the number we would need to get to to be truly free cash flow positive on a stand-alone basis.

Operator

Your next question comes from the line of Mike Albanese with E.F. Hutton. Your line is open.

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

Yeah, good morning, guys. Thanks for taking my question, and a nice quarter, you know, given some of the macro headwinds and lengthening of the sales cycle. I just want to get an update on the AI front and how you guys are utilizing technology and really if you're seeing any green shoots, you know, improving efficiencies across the organization. And I guess specifically where are you pulling out any synergies? Thanks.

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

Yeah, no. Thanks for the question. So, I think that a couple of different things. So, the first thing that we pointed out to today in the call was the progression of some of the new products that we have in the market, namely Risk Connector and some of the traction that we're seeing there.

That was a complete wholly built in-house product that we kind of went out to market with to go after the sort of supply chain market and the like. You know, in the second half of my earnings call, I basically had talked about some of the new initiatives that we're launching here in the market. And I guess what I would say is that the generative AI market in general has started to coalesce around the type of product and type of go-to-market that is somewhat different from what we've kind of gone to market with traditionally. So, if you look at very recent product lines from Microsoft or from kind of growth-oriented start-ups and the like, a lot of the product lines that we're seeing are coalescing around call it per-user pricing of $50 to $200 a month per user.

And then pricing, very, very targeted generative AI capabilities for those customer sets. And so, essentially what I talked about is that, over the course of the next couple of weeks, our intention is to implement a similar kind of copilot strategy for the legal and regulatory space to essentially take the data that we have embedded within kind of generative AI capabilities and then help lawyers, legal professionals, regulatory professionals draft documents, create legislation, create laws, whatever the case is, and then effectively charge in a similar price point several hundred dollars a month per user, such that people can essentially go out there and swipe a credit card and go to market very quickly. And so, what that effectively means is that, you know, we've been in development with a series of these copilot products for some time now. And we expect that actually in a different go-to-market channel, different from a heavy enterprise sales model that we're going to try and go with a more product-led [Inaudible] kind of user-driven model here to drive faster revenue generation and kind of really lead into the generative AI market a lot more aggressively.

So, we are seeing pretty good traction here overall, and I think that's something that we're going to continue to monitor as we try and reaccelerate the growth of the business.

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

Got it. Thank you.

Operator

[Operator instructions] There are no further questions at this time. I will turn the call back to CEO Tim Hwang for closing remarks.

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

Yeah. I appreciate everybody taking the call here and definitely looking forward to another great quarter. 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

Matt VanVliet -- BTIG -- Analyst

Josh Resnik -- President and Chief Operating Officer

Mike Latimore -- Northland Securities -- Analyst

Zach Cummins -- B. Riley Financial -- Analyst

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

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

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