Donnelley Financial Solutions Inc

Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelly Financial Solutions first quarter 2022 earnings 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 would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Mr. Mike Zhao, Head of Investor Relations, you may begin your conference.

Thank you.

Good morning, everyone, and thank you for joining Donnelly Financial Solutions' first quarter 2022 results conference call. This morning, we released our earnings report, supplemental trending schedules of historical results, and investor presentation, which includes our updated long-term projections. all 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 detail in our most recent 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 earnest 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 Strimley, 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. As noted in this morning's press release, our first quarter results were consistent with our expectations. With net sales of $211 million, and non-GAAP adjusted EBITDA margin of 24.2%. We delivered solid financial results despite a challenging capital markets transactions environment. Our first quarter performance demonstrates that our strategy and focus has resulted in DFIN becoming more durable and structurally resilient than in the past. As we continue to invest to shift toward a more favorable recurring sales mix, while continuing to aggressively manage our cost structure and being disciplined stewards of capital. Today, we also provided an update to our long-term projections, which are included in our investor presentation that can be found on our investor relations website. Specific to our first quarter performance, I am pleased with the continued strong demand for our software offerings, where we delivered year-over-year sales growth of 15.8%. the fifth consecutive quarter of double-digit software sales growth. Software sales represented 33% of total net sales in the quarter, the highest level in defense history. On a trailing four-quarter basis, software sales made up 29% of total sales, an increase of approximately 600 basis points from the prior trailing four-quarter period. This continued positive mix shift is a reflection of our progress in transforming DFIN into a software-centric company. A major driver of the first quarter software growth was the performance of our recurring compliance and regulatory-driven software products. These compliance software offerings grew 19% in aggregate versus the first quarter of last year and accounted for approximately 63% of total first quarter software sales. The continued growth in recurring compliance software is an important step in the transformation of our business mix and financial profile to become more predictable and resilient regardless of market conditions. Leading the way for our compliance offerings was active disclosure, our cloud-native solution purpose-built for SEC reporting, which grew 29% in the first quarter. We imagined from the ground up New Active Disclosure delivers fast, simple, and secure SEC filing functions and represents a significant step forward for the marketplace in SEC compliance. As we approach the first year anniversary of New Active Disclosure's introduction, we continue to make excellent progress in transitioning clients from our prior platform to New Active Disclosure while also realizing higher price levels and longer-term subscriptions, resulting in strong annual recurring revenue. ArcSuite, the other major component of our recurring compliance software offering, delivered solid year-over-year sales growth of 15.1%, despite last year's strong first quarter driven by regulatory change. We continue to see increased adoption of our total compliance management offering, a component of ArcDigital, albeit at a more modest pace than in 2021 when the solution was first introduced in response to regulatory change. In addition to the growth coming from total compliance management, I am encouraged by the solid subscription revenue growth across the ArcSuite modules. Our transactional software venue experienced tremendous growth in 2021, driven by a robust capital markets transactions environment. Despite the decline in capital markets transactions in the first quarter of 2022, Venue performed very well as the level of underlying activity taking place on our virtual data room platform remained resilient. Venue sales grew 12%, significantly outpacing the market trend of its primary use case, which is M&A. Further, I am proud that Venue has been named USA M&A Virtual Data Room of the Year by Global M&A Network, a recognition venue has earned for the sixth consecutive year. Overall, I'm encouraged by the performance of our software solutions portfolio and believe both our recurring and transactional software products are well positioned for the future. As it relates to capital markets transaction sales in the quarter, transactional activity was impacted negatively by the capital markets volatility. creating a very soft IPO market and a weaker M&A environment, with many companies opting to delay transactions. Specifically, global IPO activity was down 85%, and very few large M&A deals were completed in the quarter. Additionally, the SPAC market, which produced a record number of SPAC registrations in 2021, took a significant pause in 2022. As recent market volatility and proposed new regulations dampened enthusiasm across both new SPAC issuances and announced de-SPAC transactions. While it has been a challenging environment to start the year, history has demonstrated that change in the transactions markets can be swift. Let me point to two areas that illustrate the potential for a swift change. First, Despite the drastic decline in completed IPOs during the first quarter, our pipeline of in-process IPOs remains robust. EFIN currently has several hundred IPO clients continuing to work, such as updating their filing with current financial statements in order to be ready to take advantage of the market when the window opens. Our current level of in-process IPOs is comparable to the level we experienced in 2021. Given the steps our clients are taking to remain ready to go public, we expect them to respond quickly when market volatility subsides. Second, regarding M&A, despite increased macroeconomic headwinds, including a sustained high level of inflation and the likelihood of additional interest rate increases, the demand for high-quality assets remains robust. Combined with the record level of available capital and a large existing SPAC universe seeking a target, M&A is likely to remain more resilient. I am confident with our strong market position and client relationships, EFIN is very well positioned to support the capital markets transactional needs as activity levels return. From an overall sales perspective, the decline in capital markets transactions, along with the planned print and distribution sales reduction, more than offset the growth in software solution sales, resulting in a consolidated net sales decline of 14% from last year's first quarter. Excluding print and distribution, year-over-year net sales decreased 10% in the quarter. First quarter non-GAAP adjusted EBITDA was $51.1 million, a decrease of 28% from last year's first quarter, and non-GAAP adjusted EBITDA margin was 24.2%, a year-over-year decline of approximately 480 basis points. While our margin contracted versus last year's first quarter, which had nearly twice the amount of transactional revenue, from a multi-year perspective, the first quarter 2022 non-GAAP adjusted EBITDA margin is much stronger than historical quarters with similar levels of total sales and transactional revenue. Against those quarters of comparable total and transactional sales, First quarter 2022's non-gap adjusted EBITDA margin is higher by more than 1,000 basis points, reflective of our improved sales mix. Our ability to operate at a higher level of profitability across varying points in the market cycle is a further proof point of our strategy and execution, resulting in DFIN being fundamentally more profitable and resilient than in the past. At quarter end, our non-GAAP net debt was lower than last year's first quarter by $30.5 million, resulting in a non-GAAP net leverage of 0.7 times, 0.3 times lower than the first quarter of 2021. We repurchased 1.2 million shares during the first quarter of 2022, continuing the trend of opportunistic share repurchases given our current valuations. At quarter end, we had $123 million remaining on our share authorization. As we have demonstrated over the past several years, our performance has been well ahead of our original five-year plan we provided during our May 2018 investor day, as well as ahead of the updates we have shared periodically. With a solid foundation created by the results of our transformation to date, we are well positioned to deliver increasing value to our three stakeholders, our customers, our employees, and our shareholders. We will continue to be guided by our aspiration to become the leading provider of compliance and regulatory solutions and remain focused on executing against each of our plan objectives to drive long-term, sustainable, profitable growth and value creation. Let me highlight one aspect of our long-term plan that we are very excited about. At the time of our spin five years ago, Software sales comprised approximately 14% of our total sales. Through our transformation and growth initiatives, we have doubled software sales in five years, which also nearly doubled the proportion of our sales being generated by software sales, from 14% in 2016 to 27% in 2021. As we look forward, we see further opportunities in our organic capabilities, the more than double software sales mix, from our 2021 level, and we expect software will make up nearly 60% of our total sales by 2026. Additionally, our updated projections have us exceeding our 44 in 24 goal of targeting 44% of our sales from software solutions by the year 2024. Perhaps more importantly, we expect more than 70% of software sales in 2026 to be recurring revenue. driven by the growth of our compliance software, providing a strong foundation of annual recurring revenue. While we cannot predict the future regulatory landscape, DFIN is well positioned to leverage our software offerings and our sales and deep domain service expertise to address the market needs related to future regulatory changes. We are enthusiastic about the opportunities over the next five years to continue on the path of sustained value creation. Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our first quarter financial results, outlook for the second quarter of 2022, and our updated long-term projections.