Donnelley Financial Solutions Inc

Ladies and gentlemen, thank you for standing by and welcome to the Donnelly Financial Solutions Second Quarter 2021 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mike Zhao, Head of Investor Relations. Thank you. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining Donnelly Financial Solutions' second quarter 2021 results conference call. This morning, we released our earnings report, a copy of which can be found in the investor section of our website at DFINSolutions.com. During this call, we'll refer to forward-looking statements that are subject to risks and uncertainties. For complete discussion, please refer to the cautionary statements included in our earnings release and further details in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and other filings with the SEC. Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP financial information provides you with useful supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the earnings release and related tables for GAAP financial information and reconciliations of GAAP to non-GAAP financial information. This morning, I'm joined by Dan Lieb, Dave Gardella, Craig Clay, Eric Johnson, Floyd Strimling, and Kami Turner. I will now turn the call over to Dan. Thank you, Mike, and welcome to your first earnings call at DFIN. Mike recently joined DFIN from Teradata, an enterprise SaaS company, where he led finance for one of their go-to-market segments. At DFIN, Mike is heading up financial planning and analysis, as well as investor relations, working closely with Dave. We look forward to you meeting Mike. Good morning, everyone. And from all of us at DFIN, we hope that you and your families are staying safe and healthy. After a very strong start to the year in the first quarter, I am again pleased with the momentum in our second quarter operating performance, as well as within our end markets. On our last few quarterly calls, we noted that we had been seeing a return to a more normalized level of growth in software sales and a significant increase in transactional activity. The momentum in software sales accelerated in the second quarter, while the transactional environment within capital markets remains strong. Our second quarter results offer another proof point of the success of DFIN's transformation and our 44 in 24 strategy, specifically targeting 44% of our sales from software solutions by the year 2024, and more importantly, the resulting financial profile from such a business mix. For eight consecutive quarters, we have expanded year-over-year adjusted EBITDA margins as our business mix changes. This has involved investing heavily in some areas for profitable growth, aggressively managing expenses in other parts of our offerings, and eliminating some offerings altogether. Over this two-year period, on a trailing 12-month basis, our overall revenue increase of 3% or $27 million reflects our changing mix. Our revenue change is comprised of growth in software sales of $50 million or 27%, tech enabled services growth of $87 million or 23%, and a decline in print and distribution of $110 million or 32%. These are large changes over a two year period, yet they are positive changes for our business. Our software offering now totals $232 million, with roughly two thirds of that being recurring high retention rate offerings. The balance of our software offering is largely driven by the corporate transactions market. By year end, we expect our software sales to exceed our print sales for the first time in the company's history, representing approximately 30% of our total revenue. And when we talk about our 44 and 24 strategy, We note, in addition to the mix shift, what's more important is the resulting financial profile from such a business mix. Two of the resulting financial aspects are an increase in profitability and an increase in margin. Over the same two-year period, adjusted EBITDA has been up by over $100 million, driving margin up 1,000 basis points to 25%. At quarter end, our trailing four-quarter adjusted EBITDA is $233.5 million. In short, our strategy is delivering strong results. We look forward to sharing ongoing progress with you as we execute our strategy. As it relates specifically to the second quarter results, total sales grew 5.3% from last year's second quarter. Excluding print and distribution, year-over-year net sales increased 23% in the quarter as software solution sales grew 40% and tech-enabled services grew 16%, overcoming a decline of 26% in print and distribution-related sales. As a reminder, The decline in print and distribution sales is a result of the regulatory change in the investment company's business and our proactive exiting from low-margin printing contracts, consistent with our strategic priority of investing to grow the more attractive recurring software and tech-enabled services aspects of our business. The record high quarterly software solution sales was led by our recurring compliance products, which in aggregate grew 36% over the second quarter of last year. We've received positive market feedback and strong client adoption for our recent product launches, particularly in active disclosure and total compliance management, a component of our Arc Digital offering, along with Arc Pro, contributing to the 36% growth in our recurring compliance software sales. In addition, our virtual data room product venue achieved another all-time high for quarterly sales and grew approximately 50% year-over-year, largely driven by an increase in M&A deal activity and, once again, what we believe to be market share gains. Similar to the last few quarters, the strength of the capital market's transactional activity has and our strong market share resulted in robust sales growth, with transactional sales increasing more than 38% from the second quarter of 2020. The growth in higher margin software solutions and tech-enabled services net sales, our proactive pruning of low margin print work, along with the significant impact of our ongoing cost control efforts, including execution of our aggressive plan to right-size our print platform in light of the regulatory impact on print demand, again resulted in strong quarterly earnings. Second quarter non-GAAP adjusted EBITDA was $79.9 million, an increase of over 31% from last year's second quarter. An adjusted EBITDA margin was 29.9%, up 600 basis points from second quarter 2020 adjusted EBITDA margin. Given the trend I noted earlier with eight consecutive quarters of expanding year-over-year EBITDA margin, our trailing four-quarter adjusted EBITDA margin is currently 25%, tracking well ahead of our long-term target of at least 20%. As I highlighted on our last call, the steps we took during 2020 and continue to take in 2021 to optimize our operations, streamline our organizational structure and real estate footprint contributed to our second quarter growth in adjusted EBITDA and expansion of adjusted EBITDA margin. At the same time as having aggressively managed the cost structure in certain areas, we've also increased investment levels in support of our strategic priorities. Specifically, we've allocated more resources in terms of both people and dollars toward our software products and the technology that supports these products. To be clear, while we've increased investment in this area to accelerate our transformation, we've done so with the same disciplined approach we've taken historically, targeting areas and projects where we expect to deliver superior economic returns. Free cash flow in the quarter improved by $16.5 million, despite funding $15.7 million related to the LSC multi-employer pension plan obligation. Dave will cover this topic in more detail. At quarter end, our non-GAAP net debt was lower than last year's second quarter by $112.3 million, resulting in a non-GAAP net leverage of 0.9 times, 1.2 times lower than the second quarter of 2020. Before I share a few business highlights, I would like to turn the call over to Dave to provide more detail on our second quarter financial results and our outlook for the third quarter. Dave? Thank you, Dan, and good morning, everyone. As Dan noted, we delivered very strong results in the quarter, including 5.3% sales growth. and significant year-over-year increases in non-GAAP adjusted EBITDA, adjusted EBITDA margin, non-GAAP adjusted earnings per share, and free cash flow. We maintain strong market share in our transactional filing business and posted 40% growth in our software solution sales, all while continuing to drive operating efficiencies. On a consolidated basis, net sales for the quarter were $267.5 million, an increase of $13.5 million, or 5.3%, from the second quarter of 2020. Software solutions net sales in the second quarter increased by $19 million, or 39.9%, primarily due to an acceleration of virtual data room activity and venue driven by the improved M&A environment accelerated product adoption within arc suite as well as solid subscription growth in active disclosure tech enabled services net sales increased by 18.6 million dollars or 16.1 percent primarily due to increased capital markets transactional activity britain distribution revenue decreased by 24.1 million dollars or 26.5 percent primarily due to the regulatory driven reduction in demand for printed materials within investment companies and less commercial printing where we have proactively exited certain low margin contracts. This decline was partially offset by higher print related sales as a result of the increased transactional activity within capital markets. Regarding our print platform, we have made substantial changes over the past couple of years. By year-end 2021, we expect to be utilizing our third-party network for approximately 85% to 95% of our print needs, variabilizing the cost structure for the majority of our print production, and at the same time, operating our own digital-only print platform to meet the demand for higher-value, quick-turn requirements. Second quarter nine-gap gross margin was 56%. approximately 970 basis points higher than the second quarter of 2020, primarily driven by a favorable business mix featuring growth and higher margin tech-enabled services and software solution sales, combined with lower overall print volume and the impact of ongoing cost control initiatives. Non-GAAP SG&A expense in the quarter was $70 million, for $13.2 million higher than the second quarter of 2020. As a percentage of net sales, non-GAAP SG&A was 26.2%, an increase of approximately 380 basis points from the second quarter of 2020. The increase in non-GAAP SG&A is primarily due to sales commissions on higher sales, changes in the business mix, and higher incentive compensation expense, partially offset by the impact of ongoing cost control initiatives. Our second quarter non-GAAP adjusted EBITDA was $79.9 million, an increase of $19.1 million or 31.4 percent from the second quarter of 2020. Our second quarter non-GAAP adjusted EBITDA margin was 29.9 percent, an increase of approximately 600 basis points from the second quarter of 2020 Again, primarily driven by the favorable sales mix and ongoing cost control initiatives, partially offset by higher incentive compensation and selling expenses. Turning now to our second quarter segment results, net sales in our capital market software solution segment were $43.8 million, an increase of 37.7% from the second quarter of 2020, primarily due to increased venue virtual data room activity and continued growth in active disclosure subscriptions. Venue sales increased approximately 50% from the second quarter of 2020, driven by an improving M&A environment and sales and marketing efforts focused on gaining market share and accelerating growth while our recurring compliance products after disclosure in file 16 also had a solid quarter, posting 26% growth in aggregate. Non-GAAP adjusted EBITDA margin for the segment was 29%, an increase of approximately 1,260 basis points from the second quarter of 2020. The increase in non-GAAP adjusted EBITDA margin was primarily due to the increased sales, a favorable sales mix, as well as the impact of operating efficiencies partially offset by higher selling expenses as a result of the increased sales volume. Net sales in our capital markets compliance and communications management segment were $153.1 million, an increase of 26.7% from the second quarter of 2020, primarily due to increased capital market transactional activity, continuing the trend that began in the third quarter of 2020. This growth was largely driven by the ongoing momentum in IPO activity, as well as increased M&A activity, including D-SPAC transactions. Non-gap adjusted EBITDA margin for the segment was 43.4%, an increase of approximately 260 basis points from the second quarter of 2020. The increase in non-gap adjusted EBITDA margin was primarily due to the increased sales volume and a favorable sales mix. As we anticipated and also communicated on our last call, we did see a sequential decline in SPAC IPO registration activity based on the SEC statement regarding the accounting classification of warrants and their potential action on legal protection for growth projections. Second quarter sales driven by SPAC registrations were less than $400,000 compared to approximately $3.6 million in the first quarter. Over the last four quarters, we've completed 139 SPAC registrations and have generated approximately $6.2 million in sales for these transactions. As it relates to this activity, the bigger opportunity lies ahead as the value of a de-SPAC transaction is, on average, 10 times the value of the initial registration transactions. Further, these transactions provide a pipeline for recurring software subscriptions to support our clients' ongoing compliance requirements. Net sales in our investment company software solution segment were $22.8 million, an increase of 44.3% from the second quarter of 2020 to primarily due to strong demand for our ARK Digital Total Compliance Management offering in the quarter, which continues to gain momentum since we launched it in the second quarter of 2020, with new opportunity rising out of the regulatory changes affecting investment companies. In addition, growth in ARK Pro related to new subscription activity and organic growth from existing clients also fueled the growth in this segment. Non-GAAP adjusted EBITDA margin for the segment was 29.4%, an increase of approximately 600 basis points from the second quarter of 2020. The increase in non-GAAP adjusted EBITDA margin was primarily due to the increase in sales and a favorable sales mix, partially offset by higher incentive compensation expense. Net sales in our investment companies' compliance and communications management segment were $47.8 million, a decrease of $37.8 million, or 44.2% from the second quarter of 2020, due to the impact of regulatory change in investment companies affecting print-related sales and a reduction of commercial printing sales related to contracts we have proactively exited. Non-GAAP adjusted EBITDA margin for the segment was 10.9%, approximately 290 basis points lower than the second quarter of 2020. The decline in non-GAAP adjusted EBITDA margin was primarily due to the lower activity levels for print and distribution. This impact was partially offset by a reduction in overall expense within the segment. primarily due to cost savings as a result of the consolidation of the print platform and a lower allocation of overhead costs, which are now being absorbed by our other three operating segments, as the lower activity level in this segment results in a reduced need for such shared resources. Second quarter has historically been our peak quarter in terms of print activity, and with approximately 60% of the reduction in print demand now behind us, the execution of our plans to consolidate the print platform and to capture the related cost savings continue to track ahead of plan. Regarding the regulatory change that will continue to reduce demand for print in this segment, We continue to expect a reduction in print-related net sales of approximately $130 million to $140 million and a reduction in non-GAAP adjusted EBITDA of approximately $5 million to $10 million related to the regulatory change. Non-GAAP unallocated corporate expenses were $11.2 million, an increase of $2 million from the second quarter of last year. The increase in unallocated corporate costs was primarily due to increased incentive compensation driven by the strong performance, partially offset by the impact of ongoing cost control initiatives. Free cash flow in the quarter was $20.9 million, representing an improvement of $16.5 million from the second quarter of last year. As Dan mentioned earlier, this improvement was despite having funded $15.7 million related to the LSC multi-employer pension plan obligation, the vast majority of which was related to lump sum settlement payments with two of the three plans. Last year's second quarter did not include any payments related to this item as we began making payments in the third quarter of 2020 So the full $15.7 million cash outflow was incremental to last year's second quarter. As a reminder, DFIN and RR Donnelly agreed to share required payments equally, and an adjustment and repayment will be made as needed in accordance with the final allocation determined in arbitration, which we expect to occur before the end of the year. We ended the second quarter with $240.9 million of total debt and $201 million of non-GAF net debt, including $10 million drawn on our revolver. From a liquidity perspective, we had access to the remaining $287.7 million of our revolver, as well as $39.9 million of cash on hand. As of June 30, 2021, our non-GAAP net leverage ratio was 0.9 times, down 1.2 times from the second quarter last year. Our cash flow is historically seasonal. We are a user of cash in the first half and generate more than 100% of our free cash flow in the second half of the year. As our sales mix continues to evolve to proportionally more subscription-based software solutions, we expect the seasonality to be less significant. During the quarter, we amended and extended our credit agreement to, among other things, provide for a $200 million delayed draw term loan aid facility and to extend the maturity of the $300 million revolving facility to May 27, 2026. The proceeds of the term loan may only be used to redeem or repurchase the company's eight and a quarter percent senior notes due 2024, which become redeemable on or after October 15th, 2021. It is our intent to redeem these notes at that time, which following that transaction will lower our annual interest expense by approximately $14 million. The company repurchased approximately 251,000 shares of common stock during the quarter for $7.1 million at an average price of $28.19 per share. We have approximately $39.6 million remaining on our $50 million stock repurchase authorization. As it relates to the third quarter, transactional activity in capital markets remained robust throughout July. Regarding our outlook for the quarter, we are expecting consolidated net sales to be in the range of $200 million to $210 million, down approximately $5 million or 2.5% year-over-year at the midpoint due to the planned reduction in print and distribution for the regulatory changes related to SEC Rules 30E3 and 498A. Excluding print and distribution, third quarter revenue is estimated to grow by approximately 14% at the midpoint of our range. We remain bullish on the near-term outlook for our software solution sales, as well as on capital markets transactional activity. From a profitability perspective in the third quarter, we expect a non-GAAP-adjusted EBITDA margin in the low to mid-20% range, similar to last year's third quarter margins. With that, I'll now pass it back to Dan. Dan? Thanks, Dave. The execution of our strategy continues to deliver positive results. Our new software offerings continue to attract strong interest and adoption. The momentum in software combined with our strong position in the transactional market has enabled us to generate sustained sales growth over the last four quarters. In addition, We have now delivered year-over-year expansion in EBITDA margins for eight consecutive quarters, demonstrating the continued improvement in our business mix and disciplined cost management, while also increasing investments to accelerate our strategy. The trends in our top and bottom line results reinforce the value of our 44 and 24 strategies. Achieving this goal is driven by increases in our software solutions and tech enabled services sales and decreases in print sales, yielding strong margins and cash generation. In closing, we're excited about our very strong first half of the year and remain keenly focused on driving our 44 and 24 strategy. The adoption trends for our new software products and our various operational successes illustrate the exceptional value we are delivering to our clients. We continue to find and focus on opportunities to further enhance shareholder returns. Before we open it up for Q&A, I'd like to thank the DFIN employees around the world who have been working tirelessly to develop new products, maintain our operations, and ensure our clients continue to receive the highest quality service without disruption. Stay safe and healthy. Now with that, operator, we're ready for questions.

At this time, if you have a question, please press star to the number one on your telephone keypad. And your first question comes from Charlie Strasser with CJS.

Hi, good morning. Just a couple of quick questions for you. First of all, the impressive software growth that you saw in the corner, maybe dive in a little bit more detail behind the drivers of that growth. you know, especially, you know, excluding venue, you know, what are you seeing in terms of, you know, the drivers, you know, beyond that? And, you know, are you seeing a pickup in kind of D-SPAC activity leading to new business as well? Okay. Thanks, Charlie. And good morning. I'll start off and then I'll ask Craig and Eric to speak a bit about the go-to-market on some of the new products that that our engineering and product teams have recently developed and that we have in market. So if you look at our $232 million of software revenue over the past four quarters, we break it into our regulatory compliance offering, which is the majority of our software. It's purpose-built for software. our clients to comply with SEC regulatory and filing requirements. And then to your other point, the balance is primarily our venue data room. And so we're always looking for ways to serve clients to increase the recurring nature across all of our products. We have increased our spending on technology, both existing and new products, including introducing three new offerings to the market over the past year or so. And we're seeing great client interest and receptivity across the product suite, but in particular to the new products. The most recent introduction is New AD, which is a brand new build. We began to sell it in the market a few months ago. And then within our GIC business, we introduced a new product, Total Compliance Management, to support our clients in response with all the regulatory change going on with 33498A and then even more broadly. We also introduced a new offering in Europe a year or so ago. So let me pass it off to Craig, who will then also ask Eric to make a couple comments. Craig, anything to add on new AD? Sure. And I think also to touch on the SPAC piece, maybe I'll start there, which is SPACs have normalized. So post the sort of SEC scrutiny, what we've seen is really in Q2, that total SPAC count surpasses 2019's total. So it's one level that we think it's normalized. And it's a great opportunity that SPACs are creating increased public companies. And it really perfectly highlights defense value proposition. We're supporting the deal team through the traditional and new AD for the filings and the pricing. Our clients are using venue or virtual data rooms for their pipe financing. And then as well, you've got this pipeline. So 400 SPACs plus looking for a target and we're ready to support them so then you get to it's creating these great new public companies and the recurring high retention software of uav you know we took the experience of decades of servicing sec clients in q1 we launched new ad uh so built from the ground up it's purpose-driven sec compliance software browser-based it integrates with our client crp and excel where our clients last mile of financials reside simple fast onboarding and early client takeaways from those who've onboarded indicate the market wants what we have built We're very, very pleased with the pipeline. Our clients are converting from AD 3.0 to new AD. Our newly public clients through IPO or SPAC are on new AD. And certainly our competitive lens, our competitor clients are welcoming having a choice at these ends. So we're really excited about what we see with new AD, and we're looking forward to the second half of 2021 and beyond. Eric, I'll turn it to you. Yeah, thanks, Craig. And Charlie, thanks for the question. You know, for GIC, it's a few things. We've seen strong performance from our new ARC digital product and total compliance management solution launched in 2020, as well as new regulatory compliance drivers in the U.S. market, like IXBRL, Rules 30E3, and 498A. You know, our ARC suite software helps clients operationalize reg requirements. Another important factor is the velocity of technology adoption in the investment company segment, as many firms are focused on digitizing their internal processes and workflows, supporting the middle and back office. And ArcSuite is well positioned to help them achieve their digitization goals.

Great. Thank you very much for that. And then, you know, just kind of staying on that topic for just a second, if we could, you know, how much of that- Hey, Charlie, sorry.

Sorry, I was just going to add your question on the SPAC market. You know, Craig outlined kind of the opportunity going forward. I commented on the math and what we've seen historically, you know, the 139 SPACs that we've done for under registration, about 6.2 million in revenue over the last year. And then my comment around the de-SPAC transaction being typically 10 times larger. If you run through that map, there's roughly 425 SPACs that have completed a registration but have yet to complete an acquisition. So you look at the aggregate revenue opportunity in the market, it's probably, call it $200 million over the next couple years. And then even if you haircut that for completion rates and our market share, historical market share of the M&A activity, You know, to think about that as $60 to $70 million of transactional activity over the next couple years isn't unreasonable, you know, specific to SPAC or de-SPAC transactions. And then, as Craig also noted, you know, more importantly, it's creating a nice pipeline for us on the recurring software subscriptions for active disclosure. Right. And then just staying on that for just one more second, just if you think about the companies that have begun to de-SPAC, what do you feel like your share has been in terms of garnering new business from those de-SPACing companies? Yeah, I'll take a first shot at that, so thank you. Our share has been increasing, certainly from the evolving SPAC. I mean, it used to be sort of the blank check, last resort. Now it's a high-quality, high-management team doing great things. Our share has started to reflect that. So we certainly have an extremely high retention of the D-SPAC from the SPAC of our own work. And then what we're also seeing is that these D-SPACs are super, super complicated, and we can then, in those D-SPACs, actually take share from our competitor. They often upgrade their deal team, and they often then upgrade to D-SAN. But the real takeaway is this creation of new public companies, the SPAC holding company, the SPACs and de-SPACing. It's creating an amazing pipeline for us to retain those companies on new AD and create this recurring revenue. Super excited about not just the revenue, but the ongoing reporting needs of these clients and that they will be here at defense. And Charlie, just to add to Craig's comments on... you know, those, the, the SPAC registration where that company has also done an acquisition and it was, uh, or the, where the initial SPAC was handled by a competitor. Um, we've, we've taken back roughly 20% or so on the D-SPAC transaction. And then as Craig pointed out, a very high conversion rate where we don't, where we did the initial, um, SPAC transaction. It's a further context that the SPAC, as I think we've referenced on prior calls, really is a small document. So it is with the SPAC that's the real disclosure opportunity and then obviously the real reporting opportunity. Charlie, back to you.

Just on the share side, on the traditional side of your business, do you feel like you're still taking share from competitors as well?

Yes. We're in a strong division across an array of product lines, yes. Excellent. Thank you very much. Thank you, Charlie.

Your next question comes from Pete Heckman with DA Davidson.

Hey, good morning, everyone. Great results. On that last question on market share gain, on the capital market side, Do you feel like those share gains are more weighted towards just capturing a greater share of the new issues, or there's also a contribution from competitive takeaways of existing public companies? Well, I think they're both. So if you sort of think the transactional side is really your first question. In robust markets, we tend to do very well. Again, the quality of those deals, the deal teams, our sort of place in that nexus of compliance and regulatory. We do really well on the transactional side, and we're seeing that right now. The second part of your question is on the compliance side, which is the ongoing reporting needs. We've said on prior calls that we have increased share. We did that in 20 from 19. We did it in Q1 from 20, and we saw that again. So we continue to increase the number of public companies working with us. It's both taking share as well as retaining companies, newly minted companies, whether it's IPO or D-SPAC. Got it. Got it. Okay. And then just on the regulatory outlook, it's good to see 33 and 498 almost in the rearview mirror. Anything that we should be watching over the next, let's say, 18 months in terms of proposed new rules that could either be a tailwind or headwind for defense? Yeah, I'll start it out. what's happening at the SEC very closely. They're in a modernization process. You know, we're in very closely making sure that our products, Ford's on a call today, making sure that our products are ready for that, and we are. I think it's an opportunity for us. There's certainly, you know, nothing that we see as a net negative. They're talking about ESG. They're talking about additional IXBRL requirements. So we're monitoring those. None of those have been proposed. So it typically is a proposal, a 90- to many-months-long process to comment before there's a rule change. So we're certainly very far out from anything that would have any substantive change. What we hear, I think, isn't that positive, is people have to disclose and report more. Transparency is great. Yeah, I'd add to that. You know, I think when you ask, you know, relative to 18 months, tough to exactly pinpoint the timing, but, you know, Craig's last comment about enhanced transparency, disclosure, tagging of data, you know, we feel very positive about some of the things that have been discussed and that are being discussed but not yet proposed. And I'm sorry, Eric, I think you had a couple things to say. Yeah, thanks, Dan. And Pete, thanks for the question. I would just say on the GIC side of things, as Craig mentioned, we as well stay very close with the regulators. And, you know, we see our software, as I mentioned earlier, it's about operationalizing the reg requirements. So, you know, we stay very close with U.S. regulators as well as E.U., As far as the near horizon, certainly there's a lot of things in comment period, and we'll stay close to it. But, again, our software is set to really help our clients tackle any regulatory change that comes their way. Got it. That helps. I'll get back to you.

Thank you.

Your next question comes from Raj Sharma with B-Rally.

Hi. Good morning, guys. Congratulations. Another solid quarter. I wanted to understand the print declines a little bit better. Was some of the decline moved from Q2 to the second half of the year? It's my recollection that I thought that there was going to be a sort of a bigger proactive decline in Q2. So what is remaining for the balance of the year? Could you talk about that?

Yeah, Raj, it's Dave. So when you look at the overall print numbers, you know, there's a couple things going on there. One is the impact of the regulatory change, right, which was 33 and 498A. uh, that $130 million or so, um, we're about 60% of the way through that. Now you have a couple of things going the other way. Um, you know, we pointed this quarter specifically that the, the transactional environment and capital markets remain strong. And so there was some, uh, incremental print on a year over year basis, um, reflected in the numbers too so i you know i think when you look look at going forward uh on that 130 million dollars of uh print decline this year we said we're roughly 60 of the way through it and so that last 40 percent um or you know roughly 50 50 million dollars uh over the next couple quarters Yeah, and I think just to add to that is, you know, some of that variability outside of the regulatory change, you know, does demonstrate the benefit of variablizing the print platform as we've done. And so, you know, to Dave's prepared comments, um you know we now have a very nice digital platform um for higher value quicker turn types of needs uh and then we're able to go into the marketplace to scale up and and obviously you know scale down as demand dictates so is it fair to fair to say that the net reduction in print this year

is actually looking to be less than $930 million simply because of the uptake in transactions?

Yeah, that's the right way to think about it, Raj.

Okay. Thank you. And then on your Q3 guidance, any particular reason why the margins you're expecting the EBITDA margins to be, you know, 500, 600 basis points lower. If I catch that right, then Q2?

So we said low to mid 20s, similar to last year's Q3. You know, again, I think when you look at the way transactional has gone over the last several quarters, we've had $90 million plus, I think now for at least three quarters in a row. While the market remains strong in July, Q3 always tends to be a little bit lighter. And so that business mix is always an issue we're watching. And like we've talked about before, the transactional work, is a little unpredictable, although, you know, we're still bullish on the outlook, but, you know, want to just make sure that we're going to deliver against our guidance.

Right. So it's fair to say that the margins are almost entirely predicated upon the transaction part of the business, which is the wild card, sort of. But you see a... But you see... good strength in that in Q3 so far.

Yeah, so far we do. I would say the other aspect is the growth that we drive on the software solutions revenue comes through at very high incremental gross margins and flows through to EBITDA. But like you said, the biggest wild card would certainly be transactional. That's great.

Thank you for answering my questions. Great quarter again. Thanks, Raj. Thanks.

Your next question is a follow-up from Charlie Strausser with CJS.

Hi. Thanks. Just drilling down a little bit more on the Q3 guidance, Dave, if you could. Maybe some thoughts on your assumptions for each segment.

How should we think about building up the model from a segment basis there? And then picking up on the transactional side, what are you assuming for transactions for both IPOs as well as M&A?

M&A has been a very big pickup lately. Maybe give us some thoughts on that side as well. Thanks. Yeah, sure. So if I go, you know, segment by segment, we would expect, you know, both of the software segments to continue to increase pretty substantially in Q3. And then when we look at the investment companies, compliance and communications management segment, To the earlier point around the regulatory impact on print, I think the declines there would be similar to what we've seen so far this year. And then, again, the biggest wild card would be in the capital markets, compliance and communications management. segment. Certainly expecting to see growth in Q3. The comps do get tougher as you get into Q3 and also into Q4. But at a high level, I think the growth in software, the growth in capital markets compliance and communications management, and again, a little bit of that offset by the decline in print, which communications management. And then, you know, specific to transactional for Q3, you know, I mentioned that you look over the last three or four quarters we had, it's actually the last three quarters, starting in Q4 last year and the first two quarters of this year, in excess of $90 million in transactional sales. that's a pretty good number, pretty robust market there that we've seen over the last three quarters. I think, you know, looking specific at transaction, that would be a stretch to get there this quarter. But like I said, we've started off strong in July. And, you know, to the extent that the market holds up, you know, we'd probably be looking in the, call it 80 to $90 million range on transactional. Right. Obviously, you should see a traditional kind of tail down for the summer vacation doldrums, so to speak. Yep, that's right. Great. Thank you very much. Thank you.

Again, for any questions, please press star, then the number one on your telephone keypad. At this time, there are no further questions. I will now hand the call back to management for closing remarks.

Great. Thank you, Ashley. Thank you all for joining us, and we'll look forward to speaking to you in November. Thank you.

That concludes today's conference. Thank you for your participation.