Donnelley Financial Solutions Inc

Good morning. My name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Donnelly Financial Solutions fourth quarter and full year 2021 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star and the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Mike Zhao, Head of Investor Relations, you may begin.

Thank you. Good morning, everyone, and thank you for joining Donnelly Financial Solutions' fourth quarter and full year 2021 results conference call. This morning, we released our earnings report, including a supplemental trending schedule of historical results, copies of which can be found in the Investors section of our website at defense solutions.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 10k and other filings with the sec further we will discuss non-gap 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. I am joined this morning by Dan Lieb, Dave Gardella, Craig Clay, Eric Johnson, Floyd Strindling, and Cami Turner. I will now turn the call over to Dan. Thank you, Mike. Good morning, everyone. And from all of us at DFIN, we hope that you and your families are doing well. I am very pleased with our fourth quarter financial results, which capped off a tremendous year for DFIN. 2021 was a year of many milestones. We developed and introduced advanced technology solutions to our clients, accelerated our sales growth of software solutions, further improved our balance sheet, and delivered increased value to our clients, employees, and shareholders. Turning now to our financial results, we delivered strong fourth quarter results, highlighted by record quarterly software solutions net sales of 73.8 million dollars which grew 36.2 percent compared to last year's fourth quarter and represented nearly 32 percent of our total net sales in the quarter our consolidated net sales grew by nearly 11 percent as compared to last year's fourth quarter despite the decline in print and distribution related sales which were as expected down 30 percent in the quarter Excluding print and distribution sales, year-over-year net sales increased 23% in the quarter. Fourth quarter non-GAAP adjusted EBITDA was $61.3 million, an increase of over 75% from last year's fourth quarter. And adjusted EBITDA margin was 26.3%, a year-over-year improvement of approximately 970 basis points. continuing a trend of year-over-year margin improvement that now stands at 10 consecutive quarters. Reflecting on the full year of 2021, we delivered outstanding results. Our team's focused execution, combined with a robust capital markets environment, resulted in record full-year software solutions net sales, adjusted EBITDA, adjusted EBITDA margin, and free cash flow. Net sales grew 11%, and excluding print and distribution, our net sales grew 30%. Software solution sales grew 35% from 2020 and reached an annual level of $270 million. Our virtual deal room software venue posted 46% annual net sales growth, driven by strong markets and share capture. while our recurring compliance offerings grew 31% versus 2020. One product within our recurring compliance offering that performed exceptionally well in 2021 was Active Disclosure, our cloud-native solution purpose-built for SEC reporting. Building on the success of Active Disclosure 3, we designed, developed, and deployed a reimagined compliance and regulatory filing software leading to the release of new active disclosure in early 2021. in 2021 we made substantial progress transitioning clients to our new platform we expect to complete that process later this year new active disclosure is born in the cloud and reimagined from the ground up the platform transforms financial and regulatory reporting with seamless integration Simple and fast onboarding and an array of intelligent core tagging and filing tools. Easy to get started, intuitive to use, and backed by the unparalleled support of DFIN experts, new active disclosure includes the collaboration tools and fast financial data linking our clients need without extra add-ons and hidden costs. This represents a significant step forward for the marketplace in SEC compliance. New Active Disclosure utilizes a modern security framework, delivering efficient financial reporting and SEC filing. Since its launch a year ago, New Active Disclosure has received tremendous market response, resulting in very strong client adoption. Our partner network agrees, as we received Oracle's Built for Net Suite approval recently. making DFIN's new active disclosure the only SEC disclosure solution on NetSuite's suiteapp.com. NetSuite joins our valuable network that includes Flowcast, Capalti, Diligent, and other best-in-class providers. We believe new active disclosure is the perfect fit for a market that is looking for a solution dedicated to SEC compliance. And we are confident new active disclosure's features security, and user experience will bring clients increased value and choice. Another strong contributor to our recurring software growth is total compliance management, a component of Arc Digital that serves our investment company clients. With the adoption of SEC Rules 30E3 and 498A, which eliminated most of the need for print associated with financial reports and variable annuity summary prospectuses, We recognized an opportunity to serve our clients in new ways via software solutions. DFIN responded to the regulatory changes by introducing our digital content distribution solution, Total Compliance Management. The new software product provides clients with a software-based solution to manage the complexities of content management and digital distribution in a post-SEC Rule 30E3 and 498A environments. I am pleased with the strong traction Total Compliance Management has gained since its launch, which was a big driver of the net sales growth for our investment company's software solution segment in 2021. We expect continued revenue lift in 2022 related to the strong adoption for this solution, albeit at a more modest pace than in 2021. Additionally, the clients who are already on the platform represent potential opportunities to expand their consumption of DFIN software offerings as future rule changes arise. Full year 2021 non-GAAP adjusted EBITDA totaled $294.8 million, the highest in the history of DFIN, up $121.4 million, or 70%, compared to 2020. Our non-GAAP adjusted EBITDA margin expanded to a record 29.7% in 2021, a year-over-year improvement of approximately 1,030 basis points. This improvement is again driven by the continued improvement of our business mix combined with prudent cost control and a strong market environment. Increased profitability and reduced interest payments help to drive record annual free cash flow of $137.7 million. Strong operating performance and cash flow generation provided us the financial flexibility to accelerate investments in software development, reduce debt, and repurchase just under 1 million shares during the year. Our performance in 2021 represents another positive proof point in our transformational journey that started five years ago when we became an independent company. We are tracking significantly ahead of our original plan that underpins our 44 and 24 goal. That is deriving 44% of our sales from software solutions by 2024. But more importantly, the resulting financial profile consistent with that mix. Further, our 2021 results are also ahead of the subsequent updates to our long-term outlook we provided since our 2018 investor day. We will share updated long-term projections soon. Before I turn it over to Dave, I'd like to take this opportunity to highlight several areas of our transformation that demonstrate the kind of business and company we have become since our spinoff five years ago. First, and perhaps the most visible aspect of our transformation, is our improved sales mix versus five years ago. In 2016, we were predominantly a print and services-based company with a small software offering. We recognized the changing demand for our product offerings, the value we could offer to clients, and envisioned a future for our company as the market-leading regulatory and compliance solutions provider. Recognizing the need to serve our clients differently, we began our journey to develop the best software products in the market, coupled with our premier sales, service, and domain expertise to serve our clients globally. In the last five years, in addition to our investments in software development to modernize and expand our product offerings, we've improved sales and marketing capabilities and established third-party partnerships, all aimed at satisfying the highest value needs of our clients. Those actions enabled us to build a growing software solutions portfolio that reached $270 million in revenue in 2021, or 27% of our total sales. nearly doubling the 2016 software sales of $136 million or 14% of sales. The revenue change from 2016 to 2021 represents a compound annual growth rate of approximately 15%. Of the $270 million in software revenue, approximately 61% or $165 million is highly recurring in nature, serving the predictable compliance needs of our clients. Our virtual data room product, Venu, accounts for the remaining 39% of software revenue. While sales growth of Venu has historically exceeded the growth of our transactional offering, Venu sales remain more volatile than our compliance offerings and have clearly benefited from the recent strength in capital markets transactions. Our recurring SaaS compliance product grew at an annualized rate of nearly 18% between 2016 and 2021, while Venue's growth rate approximated 14% annually during the same period. Overall, I am very encouraged by the performance of our software solutions portfolio and believe both our recurring compliance and transactional software products are well positioned for future growth. At the same time we scaled up our software offerings, we also took actions to strategically reduce our low-margin print and distribution revenue and significantly downsize our print production platform. Between 2016 and 2021, our print and distribution revenue declined by more than $180 million. The pace of decline accelerated in 2021 with approximately $100 million in lower print and distribution revenue resulting from regulatory changes and our proactive exiting of low-margin print contracts, which impacted our investment company's compliance and communications management segment. On that $100 million of lower sales, we lost approximately $3 million in adjusted EBITDA. The reduction of printing was cash flow positive, given the elimination of the associated working capital requirements. Print and distribution sales made up approximately 20% of total sales in 2021, around half the level in 2016. With our strong growth in software sales and the reduction in print and distribution, 2021 represented the crossover point. Full-year net sales from software solutions exceeded net sales of print and distribution, a first for our company and a trend we expect to continue. Our mixed shift was a major driver of DFIN's non-GAAP adjusted EBITDA margin expansion since 2016. Despite losing $180 million in print and distribution sales compared to 2016, we increased our non-GAAP adjusted EBITDA significantly, which in turn led to robust margin expansion. Our 2021 year-end adjusted EBITDA margin reached 29.7%, compared to a margin of 16.4% at the end of 2016. The step up in EBITDA margin is a reflection of our revenue mix shift and aggressive cost management actions we took that targeted many aspects of our fixed cost structure, with focus on our print platform, driving internal efficiencies, and reducing our physical footprint. Through these actions, we achieved permanent fixed cost reduction. allowing us to create a more optimized and variable cost structure that closely aligns with our current business mix, a part of which is driven by cyclical market factors.

Another result of our strategic transition is that at the time of our spinoff in 2020, we had $1.5 million of net debt. This is a significant reduction that should occupy, given our evolving business mix, including Through strategic capital allocation over a span of five years, we have reduced our net debt by approximately $500 million per share. As a result, at year-end 2021, we have to continue to aggressively invest in software development where financially justified.