Donnelley Financial Solutions Inc

Good morning. My name is Joseph, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelly Financial Solutions second 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'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, Press star 1. Thank you. Mike Zhao, Head of Investor Relations, you may begin your conference.

Thank you. Good morning, everyone, and thank you for joining Donnelly Financial Solutions' second quarter 2022 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 investor section of our website at DFIMSolutions.com. During this call, we'll refer to forward-looking statements that are subject to risks and uncertainty. For complete discussion, please refer to the cautionary statements included in our earnest release and further detail in our most recent quarterly report on Form 10-Q and other filings with the SEC. Further, we will discuss certain non-GAAP financial information, such as adjusted EBITDA and adjusted EBITDA margin. 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 Strimling, 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. We are extremely pleased with the company's performance during the quarter, especially in light of the continuing macroeconomic headwinds, current geopolitical unrest, and related market volatility. In this difficult operating environment, we delivered excellent second quarter results, including positive constant currency year over year revenue growth, record quarterly adjusted EBITDA, year over year adjusted EBITDA margin expansion, and increases in both operating cash flow and free cash flow. Our second quarter performance serves as further proof that our strategic transformation is resulting in DFIN becoming fundamentally and sustainably more profitable, enabling us to deliver a much higher level of profitability compared with historical periods of similar revenue size. I'm also pleased with the solid progress we have made against a number of the operating objectives that underpin our updated long-term plan that we communicated on our last earnings call. First, during the second quarter, we made continued progress in transforming DFIN into a software-centric company. Total software sales grew nearly 8% versus the second quarter of 2021 and made up 26.9% of total second quarter net sales. an increase of approximately 200 basis points from last year's second quarter sales mix. As a reminder, the second quarter, largely due to the proxy season, historically represents a seasonal low for software as a percentage of revenue. On a trailing four-quarter basis, software sales reached $285 million, growing 23% from the second quarter 2021 trailing four quarters, and represented 30% of total sales in that period. An increase of approximately 480 basis points from the second quarter 2021 trailing four quarter period. This continued positive mix shift positions us well to exceed our 44 in 24 goal. That is deriving 44% of our sales from software by 2024. And also to deliver on our longer term sales mix target software sales comprising 55% to 60% of overall sales by 2026. An improved sales mix combined with operating efficiencies and the impact of structural cost reductions helped to drive solid profit and margin improvement in the quarter. Our second quarter adjusted EBITDA margin of 31% is approximately 110 basis points above last year's second quarter, and brings the trailing fourth quarter adjusted EBITDA margin to 29%, further providing confidence in our ability to achieve our long-term targets. Consistent with last quarter, our second quarter adjusted EBITDA margin is once again substantially higher than historical quarters with similar overall and transactional revenue, reflective of our evolving sales mix and scale, as well as continued cost discipline. Our ability to operate at a higher level of profitability across varying points in the market cycle is a further proof point that our strategy and execution is resulting in DFIN being fundamentally and sustainably more profitable and resilient than in the past. In the second quarter, consistent with our long-term plans, we increased investments in software development and information technology to support continued modernization, innovation, and growth. These additional investments, reflected in both expense and capital expenditures, will help to profitably scale our existing products and expand our software offerings. We view such organic investments as a high priority and will remain disciplined in our investment decisions, taking a staged investment approach to ensure projects are generating returns at or above required levels. In addition to delivering strong financial results during the quarter, We also made significant progress in the return of capital to shareholders, an important component of our long-term value creation framework. We repurchased 2.2 million shares during the second quarter of 2022, bringing our second quarter year-to-date repurchases to 3.4 million shares. At quarter end, we had $59 million remaining on our share authorization, which we intend to fully utilize by the end of 2022. Our solid financial results and prudent capital allocation continue to provide us with ample financial flexibility, which is reflected in our quarter-end non-gap net leverage of 0.8 times, 0.1 times lower than the second quarter of 2021. Finally, we took important steps to enhance Ethan's organizational talent and leadership capabilities to support our long-term growth plans. As we transform DFIN into a software-centric company, we continue to invest to drive client engagement, improve client experience, and increase lifetime value. As a result, earlier this year, we created the role of Chief Client Experience Officer, a position that will oversee client experience for all software offerings throughout DFIN. Jody Sweeney, who recently joined DFIN from Salesforce, will lead this client-centric organization that will ensure our clients have an outstanding and predictable experience as they move through their lifecycle with DFIN, from implementation to support to service. In addition, last month, we announced the appointment of Chandar Puttabaram, the current Chief Marketing Officer of Coupa Software, to our board of directors. As a highly regarded, well-rounded software executive, Chandar brings more than 20 years of B2B and enterprise marketing leadership in high-growth SaaS product offerings. We look forward to partnering with Chandar as we continue to execute on our business plan to drive growth and enhance shareholder value. As I've noted previously and reiterated today, the consistent progress against our plan is driving outstanding results. This year's market environment and our performance have demonstrated Deepin's ability to thrive in difficult market conditions and showed the strength of our recurring offerings. These recurring offerings provide our business with stability during times of market volatility while also allowing us to serve our clients and their evolving regulatory and compliance needs. One key component of our recurring revenue base is our compliance and regulatory driven software products. These recurring compliance software offerings grew 13% in aggregate or 14% on a constant currency basis versus the second quarter of last year, and accounted for approximately 61% of total second quarter software sales. The growth in our compliance software offerings is led by active disclosure, the newest SEC reporting solution on the market, which grew 20% in the second quarter. More importantly, subscription-based revenue for new AD grew 25% in the quarter, and important metrics that will help to accelerate our recurring revenue growth. Since new active disclosures' introduction, we continue to make excellent progress in the market and 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 component of our recurring compliance software offering, delivered solid year-over-year sales growth of 11% or 13% growth on a constant currency basis, despite last year's strong second quarter, driven by regulatory change that allowed us to transition clients from a print solution to a new software offering. I am encouraged by the solid subscription revenue growth across our ARC Pro and ARC reporting solutions, helping to more than offset a normalized demand profile for ARC Digital, total compliance management solution, which had a very strong adoption in 2021 following its introduction and response to regulatory change. The second component of our recurring revenue comes from compliance-related offerings within both of our compliance and communications management segments. These recurring revenues are based on capital markets compliance activities and services-based compliance solutions within investment companies. two offerings not directly affected by the current volatility of the capital markets transactions environment and the secular decline in print and distribution. Combined, these offerings assist our corporate and mutual fund clients to become and remain compliant with SEC regulations and are predominantly recurring in nature with very strong customer retention rates. In the second quarter, total compliance sales reached nearly 100 million dollars, and grew 26% versus second quarter of 2021. The strong growth in the second quarter is primarily driven by an increased volume of capital markets regulatory and compliance filings. The robust IPO and SPAC environment of 2021 increased the number of public companies while growing the demand for SEC compliance related services. We are well positioned in this space to continue to leverage our client centric service model operating scale, and domain expertise to further drive recurring compliance revenue. Our dual compliance platforms comprised of traditional offerings and software offerings allow us to support our clients in the way they prefer to work. The continued growth in both our recurring compliance software and compliance offerings within capital markets and investment companies is an important step in the transformation of our business mix and financial profile to become more predictable and resilient, regardless of market conditions. While our compliance solutions continue to gain traction, our transactions-based offerings, by their nature, are subject to volatility inherent in the capital markets deal environment. The second quarter transactional market remained challenged, with a continuation of the very soft IPO market we experienced in the first quarter. and very few large M&A deals being completed. Specifically, global IPO activity was down 90%, and the M&A market, while more resilient than the IPO market, was down 20% from last year's second quarter. Additionally, the SPAC market, which produced a record number of SPAC registrations in 2021, remained largely on pause in the second quarter. Against the backdrop of a very challenging transactions environment, I am encouraged by the fact our transactions based offerings perform better than the overall market. Our capital markets transactional revenue declined 22% in the second quarter, which within the context of the current environment outperform the broader market. Additionally, transactional revenue in the second quarter increased sequentially from the first quarter. Let me highlight two drivers behind our transactional revenue performance that enable DFIN to deliver better results than the market. First, our clients are continuing to work, such as updating their filings with current financial statements, to remain ready for when market stability returns. Our client's deal team's perspective, as well as public commentary from investment banks, confirms that activity levels and engagement are still quite high, with deals being pushed out to an undetermined time. DFIN is actively assisting several hundred clients with their transactions, And our work on those transactions is continuing even in the absence of completed deals. When market volatility, geopolitical unrest, and investor confidence stabilize, a healthy pipeline of profitable companies will be ready to list. Secondly, as the transactional market statistics are based on the total number of deals, they don't fully account for DFIN's strong position within the market for larger or more complex transactions, which generate more value for the service providers. Our industry-leading capabilities to serve large and complex deals and our strong market share within those larger transactions helped us to deliver strong transactional revenue even in a lower deal count environment. Similarly, our transactional software offering, Venu, performed better than its primary use case, M&A. With the global M&A market down approximately 20% year-over-year in the second quarter, the level of underlying activity taking place on our virtual data room platform remained resilient, enabling Venue to achieve a similar level of sales compared to the second quarter of 2021, which was up 50% from the second quarter of 2020. When excluding the impact of foreign exchange rates, Venue posted modest sales growth of 2%. Finally, our strong second quarter results were made possible by our team of nearly 2,200 employees worldwide who share a common purpose of serving our clients by providing superior software solutions, deep domain expertise, and best-in-class service. Since we became an independent company nearly six years ago, the development of our people and culture had been at the forefront of our management agenda. Through continued focus, benchmarking with leading companies, and investments in our employees, we have made meaningful progress resulting in deepening being a great place to work. Internally, we are receiving positive feedback from our employees on our updated career and compensation framework, initiatives that advance diversity, equity, and inclusion, and our fully flexible work environment. Externally, we continue to be recognized for the progress we are making to transform our culture and enhance the employee experience. I am pleased that DFIN has recently achieved certification as a most loved workplace. a coveted accolade promoted in Newsweek magazine that validates our ongoing commitment to creating an inclusive environment where employees can do their best work every day. I believe if we continue to do the right things, we will continue to be an employer of choice and deliver superior results for our clients and shareholders. Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our second quarter results and our outlook for third quarter.