Donnelley Financial Solutions Inc

Thank you for standing by. My name is Kayla Baker and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelly Financial Solutions first quarter 2023 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 star and the number one. I would now like to turn the call over to Head of Investor Relations, Mike Zhao. You may begin.

Thank you. Good morning, everyone, and thank you for joining Donnelly Financial Solutions' first quarter 2023 results conference call. This morning, we released our earnings report, including a supplemental trending schedule of historical results. copies of which can be found on the investor 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 10-K, 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, adjusted EBITDA margin, and organic net sales change. 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 Kami Turner. I will now turn the call over to Dan.

Thank you, Mike, and good morning, everyone. We delivered strong, consolidated first quarter results given the economic backdrop. with net sales of $198.6 million, non-GAAP adjusted EBITDA of $42.4 million, and non-GAAP adjusted EBITDA margin of 21.3%. Our first quarter performance, again, delivered a higher level of profitability compared to historical quarters with similar overall and transactional revenues. Another proof point that the execution of our strategy has resulted in DFIN becoming more durable and structurally resilient 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. As I mentioned, our first quarter performance was in the context of a very challenging operating environment. As capital markets transactional activity continued to be severely impacted by the combination of macroeconomic headwinds and market volatility. For context, the level of IPO transactions during the first quarter remained at record low levels, down approximately 95% from the peak reached in the first quarter of 2021, while M&A activity also remained far below historical levels. Combined, these headwinds resulted in the lowest level of quarterly capital markets transactional revenue since our company's inception in 2016, a level which is down approximately 20% from the first quarter of 2022 and down approximately 55% from the first quarter of 2021. I am pleased that during the prolonged downturn in capital markets transactional activity, our business has proven to be resilient and substantially more profitable. Specifically, our first quarter 2023 adjusted EBITDA margin of 21.3% is 1,100 basis points and 770 basis points higher than the first quarters of 2019 and 2020, respectively, both of which had higher levels of both overall sales and transactional sales. Our performance reflects our evolving sales mix, permanent changes to our cost structure, and continued cost discipline, and further demonstrates our ability to sustainably operate at a higher level of profitability across a range of market conditions. Dave will cover the first quarter results in more detail shortly. A key factor behind our margin performance has been the progress we have made toward creating a cost structure and operating model that better aligns with our business mix, part of which is driven by cyclical market factors. Over the last several years, to establish an optimized and variable cost structure in areas of the business that have both seasonal and cyclical fluctuations, we took aggressive cost actions that targeted many aspects of our fixed cost base, with focus on downsizing our print production platform, driving internal efficiencies, and reducing our physical footprint. During the first quarter, we took additional cost reduction actions to better align our cost structure with our current level of sales, part of which is subject to the uncertain outlook for capital markets transactions. These measures, in combination with our previous cost reduction efforts, permanently reduce fixed costs, simplify our operations, and further improve DFIN's resiliency across various market conditions. As we continue to gain efficiencies across our operations, we also remain focused on reinvesting in areas of our business to accelerate our transformation into a digital first company. In the first quarter, consistent with our plan, we made incremental investments in both our software offerings and associated business processes to support continued modernization, innovation, and growth. These investments, reflected in both operating expense and capital expenditures, will help to profitably scale existing products, increase our velocity to market, and enhance client experience as we have discussed in the past we are creating a unified compliance platform an ecosystem that benefits defense compliance solutions for corporations mutual funds exchange traded funds and regulated insurance companies specifically our platform integrates capabilities across our market leading regulatory and compliance software solutions active disclosure and arc suite to combine foundational capabilities across composition, tagging, filing, and regulatory and financial reporting into a single solution while maintaining client segment unique capabilities. This platform, in conjunction with our deep domain service expertise, allows us to address clients' evolving regulatory and compliance needs under current and future regulations. Our investments have enabled us to increase development velocity and efficiency with the most modern technology and security protocols employed. Specific to our first quarter performance, I am encouraged with the positive momentum in our software offerings, where we delivered year-over-year net sales growth of nearly 4% on an organic basis, despite a slight decline in our largest software offering venue. Software Solutions net sales represented 35.3% of total net sales in the first quarter, an increase of approximately 220 basis points from last year's software sales mix. On a trailing four-quarter basis, Software Solutions net sales made up approximately 34% of total net sales, an increase of approximately 500 basis points from the first quarter 2022 trailing four-quarter period. This continued positive mix shift toward recurring offerings is a reflection of our progress in transforming DFIN and positions us well to achieve our long-term target of deriving 55% to 60% of total net sales from software solutions by 2026. A major driver of the first quarter software growth was the performance of our recurring compliance and regulatory-driven software products, which include Active Disclosure and ArcSuite. Net sales for these recurring compliance software offerings grew approximately 5% on an organic basis versus the first quarter of last year and accounted for nearly 65% of total first quarter software solutions net sales. The growth in our recurring compliance software offerings is led by ArcSuite, which delivered first quarter net sales growth of 6.4% growth on an organic basis. In the first quarter, ArcSuite net sales reached $26.4 million, which was a quarterly record driven by continued client adoption. In addition, I'm encouraged by the solid growth in subscription revenue. During the first quarter, ArcSuite's net sales growth was below historical levels as a result of a more normalized demand for ArcDigital, our total compliance management solution, following its initial adoption, which benefited growth in 2021 and part of 2022. In addition, a shift in the implementation timeline of certain funds coming onto the ArcSuite platform delayed the realization of a portion of revenue in the first quarter. With a robust implementation pipeline combined with overlapping of the ramp-up of total compliance management, we expect higher growth in the quarters ahead. ArcSuite possesses the characteristics of a best-in-class enterprise software offering with a high component of recurring subscription revenue which makes up nearly 90% of total revenue, as well as long-term contracts with average contract length in excess of three years. As an end-to-end software solution for investment company financial and regulatory reporting, ArcSuite is well positioned to capture additional demand from current use cases, as well as from new regulations such as tailored shareholder reports. Net sales for active disclosure, our purpose-built solution for SEC reporting, grew approximately 6% in the first quarter, while active disclosure's recurring subscription revenue grew approximately 5%. As expected, the recurring subscription revenue growth for active disclosure was depressed in the first quarter as we finalized the transition of the remaining customers from AD3 to new AD. We remain on track to decommission legacy AD3 in the second quarter, which will allow us to shed the duplicative costs associated with operating two platforms. We expect stronger growth levels returning in the second half of 2023. Turning to our transactional-driven software Venu, consistent with what we saw throughout 2022, within the context of a very weak capital markets transactional environment, Venu continued to perform significantly better than its primary use case, M&A. With the global M&A market down nearly 30% year-over-year in the first quarter, Venu net sales were down less than 1%. We are encouraged by the level of underlying activity taking place on our virtual data room platform, which is a reflection of strong sales execution. Before turning the call over to Dave, let me provide an update on the dynamic regulatory landscape. As highlighted previously, we are in the midst of a very active period of SEC rulemaking that impacts many aspects of regulatory compliance, including disclosures, filing, and the expansion of IXBRL tagging. On last quarter's call, we mentioned three regulatory changes, tailored shareholder reports, financial data transparency act, and the pay versus performance disclosure. Let me touch on each one in more detail and discuss how DFIN assists our clients to comply with these regulations. The first regulatory change I'd like to highlight, which is already effective, is the pay versus performance disclosure. This SEC rule, which was adopted in September of last year with an effective date of December of 2022, requires public companies to disclose annually the relationship between executive compensation actually paid to the company's named executive officers and the company's financial performance. With 2023 marking year one of this new rule, DFID has been actively assisting our clients during this year's proxy cycle with our industry leading regulatory solutions to help them comply with this mandate. Pay versus performance is an example of a regulation that requires additional disclosures and advice and service from DFIN, but is not a material change to client compliance requirements. As such, we expect the value from this rule to be primarily from additional disclosure and associated data tagging. We saw some benefits from this regulation in the first quarter and expect additional benefits in the second quarter, which is the peak for proxies. As the pay for versus performance disclosure is an annual requirement, we expect to see recurring revenue benefit in the years going forward. A much larger regulatory change is tailored shareholder reports, a comprehensive rule that has broad impacts on the regulatory and compliance requirements for mutual funds and exchange traded funds. Tailored shareholder reports has a compliance date of July 2024. The rule is defined by three main elements. First is the disclosure at a share class level versus fund level. With multiple share classes per fund on average, the industry as a whole is expected to produce significantly more documents on an annual basis. Next, this rule introduces IXBRL tagging. For the first time, the investment company industry will be required to tag shareholder reports in IXBRL twice per year, which reinforces the SEC's trend towards structured data. Finally, Tailored Shareholder Reports expands compliance requirements, including layered disclosure, web hosting, and ADA compliance. All of these changes will be supplemented by updated distribution requirements, including e-delivery and print, which present significant operational changes to the industry. Being the only true end-to-end provider of regulatory and compliance solutions for investment companies, offering financial close, stylized documents, IXBRL tagging, assembly and filing, and distribution of regulatory filings, eFIN is uniquely positioned to leverage our technology leadership, service expertise, and production capabilities to help our clients successfully operationalize a straight-through process for the requirements under tailored shareholder reports. Furthermore, by leveraging our investments in platform services across eFIN, We are well positioned to service our investment company clients, providing thought leadership and guidance to educate our clients and ensure compliance with confidence. I'm pleased with the progress we have made in our tailored shareholder report solution thus far. The final regulation that has the potential to profoundly impact the regulatory and compliance landscape is the Financial Data Transparency Act legislation. For more than a decade, DFIN has actively supported the FDTA legislation, which was signed into law in December 2022. The legislation mandates that eight major US financial regulatory and supervisory agencies, including the SEC, Federal Reserve, and the FDIC, create uniform data standards for the data they collect from regulated entities. The FDTA impacts every organization involved in preparing, providing, and using financial data, including financial institutions, agencies, and technology contractors. While implementation plans for FDTA will last several years, DFIN is proud to be a leader at preparing the impacted stakeholders for FDTA readiness. Earlier in April, DFIN was the title sponsor of the Data Foundation's RegTech 2023 Data Summit where DFIN experts, along with representatives from the Data Foundation and the SEC, explored data modernization under the FDTA. A key takeaway from the discussions was that the successful implementation of FDTA will rely on innovative regulatory technology to ease the burden of compliance. Our compliance software capabilities coupled with deep domain and service expertise position DFIN well to help clients access, understand, and utilize data to meet regulatory compliance requirements in the adoption and operationalization of In addition, the SEC is expected to issue new rules requiring companies to disclose certain climate-related information, ranging from greenhouse gas emissions to expected climate risks. Yesterday, we issued a press release announcing DFIN and Salesforce are working together to offer a best-in-class end-to-end solution, enabling clients to capture and track ESG data in Salesforce's Net Zero Cloud before seamlessly reporting that data to the SEC using Active Disclosure, DFIN's financial reporting solution. In addition, with the help of Accenture, we are implementing Net Zero Cloud to track the carbon footprint of our global operations. DFIN's carbon data is now integrated into Active Disclosure, where it is automatically routed through guided workflows, sign-offs, tasks, and style content libraries to be ready for filing to meet SEC requirements. Our collaboration with Salesforce and Accenture is another example of how DFIN clients can work faster, smarter, and more securely to meet financial reporting requirements and regulatory mandates. These recent examples of regulatory changes highlight DFIN's market opportunity and compliance solutions, leveraging our end-to-end solutions to drive increased adoption of software solutions as well as higher consumption of tech-enabled services across our capital markets and investment companies' businesses. DFIN provides our clients with the best guidance and solutions to help navigate the ever-changing compliance environment for current and new SEC regulations. Each of these new regulations will leverage our single compliance platform coupled with client segment unique capabilities. Given the implementation dates of these regulations, specifically tailored shareholder reports, and FDTA that span into next year and beyond, we expect to see revenue benefits starting in 2024 with more substantial benefits in 2025 onward. 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 results and our outlook for the second quarter. Dave?