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FiscalNote (NYSE:NOTE) is a first-mover platform, that applies proprietary AI and knowledge science to supply structured political, legislative, and regulatory knowledge. Clients embody authorities businesses, companies, commerce teams, and non-profit businesses in over 80 countries.
NOTE’s inventory value has plunged from its IPO value of $10/share within the fall of 2022 to its present value of about $1/share. My funding thesis is that the inventory value will rerate as the corporate continues to efficiently scale.
NOTE STOCK PRICE (Y CHARTS)
On this research, I’ll supply proof to help my thesis by reviewing the issue that the corporate affords an answer for, the technique, administration, the corporate’s ecosystem, monetary data, issues, and dangers. I may even assessment the implications relative to NOTE being a microcap inventory.
The Drawback
Digital transformation has created a huge quantity of information that’s unmanageable with out AI and knowledge science enhancements to supply real-time construction and analyses. A number of enterprises supply the sort of answer, for instance, Bloomberg specializes in monetary analytics and knowledge.
FiscalNote’s founders discovered an unserved knowledge administration class. Reviewing the top 100 AI companies, you will not even discover the class that FiscalNote’s founders have addressed; making use of AI to supply significant political, legislative, and regulatory knowledge.
The U.S. Congress has on common produced 5 million phrases of proposed laws each two years, involving 1000’s of recent legislative acts. The chance is widened on a global foundation as every nation has completely different laws, creating complexities for governments and worldwide enterprises to navigate ESG, knowledge integrity, and compliance.
Technique
The corporate employs a Software as a Service (“SaaS”) mannequin and derives the vast majority of its income from subscriptions. It makes use of a land and expand technique which is typical within the SaaS trade, starting with a small contract for one product and including extra providers and merchandise for every respective buyer. Sometimes, starter contracts are within the $10-$15K per yr vary with some enterprises such because the U.S. Division of Protection (“DOD”) increasing to a number of million {dollars}.
The corporate has about 5000 prospects. Dividing the annual income, about $140 M on the present run charge, by the variety of prospects, traders won’t understand that the corporate is deriving a number of million {dollars} of annual income from some particular person contracts.
The corporate has a webpage devoted to examples of its land and develop mannequin and likewise has examples on the investor deck. Income from the DOD relies on a number of contracts that had been added to the unique contract over the past ten years, however earlier than the corporate turned public, so there are no press releases on the worth of those contracts. I consider that the DOD is the corporate’s greatest buyer.
Merchandise
The flagship product is the FiscalNote Government Relationship Management (“GRM”) system that identifies new laws and its implications, in real-time. GRM is the one legislative monitoring answer that’s SOC2 Kind 2 compliant. This designation provides credibility to the product whereas assuring purchasers decrease danger with improved safety. From an trade blog:
If knowledge had been cash, then SOC 2 compliance could be the very best vault on the town. The significance of SOC 2 compliance lies in its skill to reassure stakeholders that an organization’s knowledge administration is strong, dependable, and immune to safety breaches.
NOTE GRM (FiscalNote web site)
FiscalNote’s purchasers embody each member of the U.S. Congress, 60 of the Fortune 100 corporations, nearly each U.S. federal authorities company, native, state, and overseas governments, and non-profit organizations. The corporate has 17 patents and a variety of merchandise providing knowledge, analytics, and knowledge on authorities funding, laws, regulation, provide chain updates, danger mitigation, and compliance necessities.
FiscalNote has used acquisitions to develop into adjoining functions nevertheless it has additionally maintained a wholesome 10% of income devoted to R&D for the creation of recent products. FiscalNote has acquired fifteen small knowledge corporations serving small markets after which bought the acquired knowledge to a bigger market than the acquired firm might by itself.
Administration
Good management is essential for microcaps, significantly startups, as a result of absent good administration it’s unlikely {that a} microcap will survive. The standards that I exploit to guage microcap administration embody having a transparent imaginative and prescient, a roadmap, and execution. Further credit score goes to founder-led corporations as they have an inclination to outperform odd corporations.
Founder owned companies beat the market (LiveWire)
FiscalNote is led by Co-founder and CEO Timothy Hwang who together with the administration staff has established and executed a transparent technique as described above. How Mr. Hwang got here to achieve his perspective on the planet of politics is of curiosity right here. He turned concerned as a teen residing within the Washington, DC space, working as a volunteer for a number of political candidates together with Barack Obama in 2007. The next yr, Mr. Hwang was elected to serve within the Montgomery County, Maryland Board of Schooling.
Mr. Hwang obtained his schooling in pc science at Princeton and was accepted to Harvard Enterprise Faculty, which he didn’t attend. As an alternative, he co-founded FiscalNote, wanting to make use of his pc expertise to assist make politics extra environment friendly from what he skilled as a marketing campaign employee and public official in D.C. He co-founded FiscalNote on the age of 21 in 2013 alongside together with his highschool pals, Gerald Yao, and Jonathan Chen. The founders used a Motel 6 room in Sunnyvale, California as the corporate’s first headquarters the place they labored around the clock to create the corporate’s preliminary product, pursue funding, and entice preliminary purchasers.
Mr. Hwang obtained the help of Mark Cuban by way of a easy e mail. Mr. Cuban went on to grow to be a lead investor together with Jerry Yang, offering seed cash of $1.3 M to fund the creation of recent merchandise. From there, FiscalNote was in a position to entice different traders and land a listing on the NYSE by way of a merger with Duddell Avenue Acquisition Corp, a particular goal acquisition firm (“SPAC”)
A full itemizing of administration and the board of administrators will be discovered here.
Ecosystem
Microcaps should associate with trade giants as early as attainable to achieve gaining market acceptance. The Large Brothers assist small corporations set up credibility and supply enhanced buyer acquisition alternatives, whereas the bigger firm is supplied with entry to innovation that the small firm affords. From Better Together: Making Magic Between Big Companies and Startups:
When rising startups and massive corporations mix assets, they’ll expertise the very best of each worlds by way of innovation and clout, complementing one another’s strengths and weaknesses.
FiscalNote has a longtime ecosystem by partnering with trade big Google’s
(GOOG) launch of Bard, a conversational AI chatbot, and with equally gigantic Microsoft’s (MSFT) application of AI to its search engine Bing.
FiscalNote was chosen as one in all 14 authentic companions by Open AI as the only real supplier of political and regulatory knowledge for its Chat GPT platform and the applying of Chat GPT to FiscalNote’s Voter Voice, maybe the one advocacy answer provided with AI enhancement.
Databricks selected FiscalNote as one of many authentic companions in its Marketplace for knowledge analytics and AI.
Oxford Analytica, a each day temporary on international politics produced by FiscalNote for its purchasers, is available on the Bloomberg terminal. Oxford Analytica has been offering each day studies since 1984 and was acquired by FiscalNote in 2021,
FiscalNote partners with Peraton for its Predata answer which screens market modifications for danger and provide and demand modifications.
The corporate’s product for danger detection and provide chain monitoring for monetary establishments, Risk Connector, is offered by way of its partnership with True Digital, a expertise supplier for banks.
Monetary
There are about 129 million shares. The corporate is taken into account a micro-cap as a result of its market cap being $247 M. Final reported the corporate had about $24 M in money and $243 M in debt. The EV is $387 M.
Insiders have pores and skin within the recreation owning about 8% of the shares and establishments personal about 43% of the shares. It isn’t widespread to seek out giant institutional curiosity in micro-cap shares.
President and COO Josh Resnik has been selling inventory to offset taxes on his worker inventory choices (“ESO”).
Annual income progress has averaged virtually 20% over the past three years with recurring income topping $120 million and an annual run charge exceeding $140 million. Gross margins are about 80%. The corporate recorded its first constructive adjusted EBITDA report for Q3 2023 as acknowledged by the CEO on the earnings call:
On right now’s name, we are going to assessment our third quarter outcomes which mark our first quarter of adjusted EBITDA profitability. This can be a super milestone for the corporate. A yr in the past, we dedicated to adjusted EBITDA profitability, and that’s precisely what we have delivered. The truth is, we have delivered this one quarter sooner than we initially forecast, even amidst the tougher macroeconomic surroundings. For those who take a look at the place we had been once we started this yr, we have basically shifted our adjusted EBITDA from minus $7 million per quarter loss in Q1 to constructive adjusted EBITDA in Q3. That is an annualized enchancment of over $30 million in adjusted EBITDA, as in comparison with the place the corporate began this yr in Q1. We’ve been laser targeted on this milestone, and we’re delighted to realize it forward of preliminary expectations.
I exploit Worth-to-sales as a great comparability instrument for corporations that are not worthwhile. NOTE sells at a P/S of 1.8, a steep low cost to its peer group P/S of 9.7.
Six analysts supply coverage on NOTE with a median value goal 200% larger than the present market value. It’s uncommon to seek out six analysts providing protection on a microcap inventory.
Dangers and Considerations
The amount of shares excellent has greater than doubled from 61 million to 137 million because the IPO, however regardless of the dilution, losses have narrowed from $19.80/share to a lack of $0.81/share. That is one thing to observe as a result of the corporate has inadequate funds to hold out its operations over the subsequent 12 months in addition to missing funds to proceed on its acquisition progress plan. The corporate is sort of sure to do a capital elevate very shortly. Continued success in decreasing losses to offset share rely dilution is the system for profitability that may entice traders.
Administration set a aim of achieving constructive adjusted EBITDA and reached that aim 1 / 4 forward of schedule. I’m a bit involved concerning the lack of ahead steering or dialogue from administration on reaching constructive free money circulation.
I share Warren Buffett’s opinion on EBITDA:
It amazes me how widespread using EBITDA has grow to be. Individuals attempt to gown up monetary statements with it. We received’t purchase into corporations the place somebody’s speaking about EBITDA. For those who take a look at all corporations and break up them into corporations that use EBITDA as a metric and people who don’t, I believe you’ll discover much more fraud within the former group. Take a look at corporations like Wal-Mart, GE, and Microsoft — they’ll by no means use EBITDA of their annual report.”
In all equity, after I requested CEO Hwang about this concern throughout a latest dialog, his response was “The first goal was positive EBITDA, and attaining that, free cash flow will follow.” Hopefully, we are going to obtain steering on attaining free money circulation profitability when the 2024 steering is launched.
FiscalNote competes towards a lot bigger knowledge administration corporations which have a lot larger assets, equivalent to Bloomberg, that would resolve to supply competing merchandise.
Conclusion
The corporate has grown to be the dominant market share participant within the political, regulatory, and legislative knowledge trade, serving over 5000 prospects in over 80 nations. The shoppers embody main political our bodies, authorities businesses, and among the world’s largest corporations. All sticky prospects on recurring income SaaS contracts.
FiscalNote has established credibility by being chosen to associate with the trade giants and affords the one SOC 2 Kind 2 certification in its subject. Administration has efficiently executed its technique of progress by creating and introducing new natural merchandise, buying smaller corporations, and implementing its land and growth methods.
The inventory value has declined severely because the firm turned a public entity. The inventory now trades at a reduction to its peer group, and may rerate as the corporate continues to scale and administration turns its consideration to constructive free money circulation.