Description

FiscalNote (Ticker: NOTE) is a $170mm market cap legal data and analytics company that provides software / associated services in the public policy and geopolitical intelligence sector. NOTE is a special situation with attractive unit economics trading at a dirt-cheap valuation. We believe that the current share price is an attractive entry-point that should see upside as 1) EBITDA margins expand and improve profitability / cash flow or 2) the company is sold – currently running a sale process and we believe there are buyers.

Business Overview

NOTE was a deSPAC completed in 2022 at a $1.2bn valuation but unlike many SPACs, NOTE is a real business. Its software takes large amounts of unstructured legislative, regulatory, and geopolitical data to create digestible analytics and insights that enable decision making for enterprises, government organizations, and non-profits/NGOs. NOTE has 5k+ customers worldwide, including >60 of the Fortune 100 and >90% of revenue is recurring subscription revenue. NOTE’s software is sold under a number of brands, which primarily operate in two categories:

Public Policy and Issues Management

This is NOTE’s main product category – it offers a suite of products under a few brands including, FiscalNote, CQ, and Curate. Together, the products create the leading policy management platform. Using AI and data analytics, FiscalNote enables policy monitoring in the US and EU at different jurisdictional levels and at all stages of a rulemaking process. This allows customers to manage risk associated with regulatory change. For example, there are hundreds of thousands of rules made each year in the US – large enterprises, government agencies, and NGOs care about the ones that impact them and FiscalNote automates the tracking for clients through the legislative process – i.e., notification of hearings, changes, comment periods, etc. E.g., large enterprises have government affairs teams and this is critical software for an in-house team. This is difficult without tracking software – as an example, in the US, in addition to the federal government, there are 50 states that are constantly introducing content and bills, creating complexity for customers. Without the software, enterprises would need much larger government affairs teams just to track legislation. Enterprises need to think about the risks and outcomes of rulemaking and FiscalNote is a key part of this process.

NOTE can also act as a CRM for interactions for advocacy and provide insight on potential vote outcomes to direct lobbying work. Other services offer functionality that compete with pieces of NOTE – competitors includes Bloomberg Government, POLITICO Pro, and Quroum. NOTE’s differentiation is its easy-to-use UX and additional modules / functionality built around this core capability, and more advanced tracking of state and city bills. The Curate product is NOTE’s local government tracking platform and CQ offers transcripts of hearings, new, and analysis of federal lawmaking.

Geopolitical and Market Intelligence

 Products offer clients curated intelligence services and in-depth content, primarily via individual brands FrontierView, Oxford Analytica (acquired in 2021 and not to be confused with Cambridge Analytica), and Dragonfly Intelligence (acquired in 2023). Dragonfly provides real-time intelligence / insights about potential security risks (similar to EVBG).

Financial Overview

NOTE has an attractive financial profile with good and improving unit economics. NOTE’s revenue is >90% subscription based – current revenue make up is ~50% enterprise, 30% government, and 20% non-profits / NGOs. NOTE has ~$115mm ARR (PF for Board.org sale), growing >10% per annum, with ~99% NRR currently. Revenue screens on BBG as declining by >5% in 2024 but this doesn’t normalize for the recent divestiture of Board.org (discussed further below) – 2024 guidance is for ~12% organic revenue growth at the midpoint. NRR dipped below 100% with some churn in smaller organizations but enterprise has become the largest and fastest growing piece of the business. Larger enterprises have NRR >105% and as this segment grows within total revenue, revenue growth and NRR will inflect upwards. Growth is coming largely from new customer acquisition and is in the process of streamlining its cross-sell/upsell process, which should also benefit revenue growth rather than relying on new customers. NOTE already has high gross margins in the low- to mid-80s, in-line with best-in-class software companies with a low cost of delivery.

Total profitability has begun to inflect and is improving as management focuses on reducing cost. EBITDA inflected positive in 3Q23 and NOTE exited 4Q23 with a 9% margin and we expect the margin will continue to increase towards 20%. Improvements in profitability come even as management is reducing its reliance on stock-based comp. Management has rationalized the cost structure and margins should expand as revenue growth outpaces nominal growth in costs.

What’s the setup?

In November 2023 shares plummeted and analysts cut targets on a weaker than expected revenue outlook. However, in the earnings announcement, NOTE disclosed that it formed a Special Committee in response to statements by the company’s founder / CEO, who informed the Board of Directors that he was interested in putting together a consortium to explore a go-private transaction – the two co-founders have ~63% voting control of the company. We believe that shares would benefit significantly in a go-private transaction (the Special Committee would demand a sufficient premium) and even more so if the special committee runs a full sales process.

We believe that NOTE has a highly-attractive collection of assets that are trading at a discount. Part of this discount is attributable to the company’s balance sheet – in conjunction with the SPAC deal, NOTE entered into a ~$150mm Prime+5% term loan due 2027, but 50% of the balance needed to be paid down in equal payments over the 24 months prior to maturity. Behind the term loan sits a $47mm subordinated note held by a distressed / special sits fund. This created a difficult situation for a company that has no track record of profitability or cash generation, and resulted in the company recently monetizing a non-core asset, Board.org, which was a peer-to-peer community for execs / company employees to get unbiased reviews and insights. Like a Reddit, but where vendors are banned. NOTE bought Board.org for ~$10mm in 2021 and sold it for $95mm cash in March 2024 – this was 7x 2023 ARR, significantly higher than NOTE’s market valuation and Board.org only accounted for 10% of consolidated revenue. $66mm of the proceeds were used to repay a portion of the term loan and, in conjunction, the beginning of the amortization period was pushed back by a year to August 2026.

However, with still limited EBITDA and cash generation, the Special Committee needs to be thinking about the company’s options with respect to that future required repayment and the subsequent maturities – we believe that a sale of the business is the most likely scenario and, given NOTE’s market position and valuable product offering, that there would be strategic buyers interested in the asset, in addition to the CEO. Obviously, given the voting stake of the CEO, his buy-in will be needed for any such transaction. Alternatively, NOTE could monetize certain assets to de-risk the balance sheet and remove the debt overhang from the equity. This could possibly be done without the support of the CEO/founder, if needed. These would be the best risk-adjusted paths for the company, given its balance sheet.

NOTE currently has an enterprise value of $295mm with a $170mm market cap. This equates to 2.5x 2024E ARR (PF for Board.org sale) with net debt of 1x ARR, so this will act as a somewhat levered equity. Board.org was sold for 7x ARR. We believe the remaining assets could be sold for ~4x ARR, which would result in $2.70 stock price or about 100% upside from current price.

Key comps are:

• Intapp: ~5x revenue – faster growth profile with mid-70s gross margins
• LegalZoom: ~3x revenue – similar growth profile but with mid-60s gross margins
• CS Disco: ~2.5x revenue – valuation floor for NOTE; CS Disco has lower growth profile, mid-70s gross margins, is EBITDA negative, and has had the overhang of a leadership transition

Catalyst

• Outcome of the company's alternatives process
• Improvement in EBITDA margin from better revenue flowthrough