Donnelley Financial Solutions Inc

Thank you. Good morning, everyone, and thank you for joining Donnelly Financial Solutions' third 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 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 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. 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 Cardella, Craig Clay, Eric Johnson, Floyd Strimley, and Kenny Turner. I will now turn the call over to Dan. Thank you, Mike, and good morning, everyone.

We delivered strong consolidated third quarter results given the economic backdrop with net sales of $180 million, adjusted EBITDA of $49.4 million, and adjusted EBITDA margin of 27.4%. During the third quarter, we navigated a transactions market that despite some signs of improvement, remained weak. As a result of strong execution, we increased our third quarter adjusted EBITDA by $4.1 million, or 9.1% year over year, and expanded our adjusted EBITDA margin by 340 basis points from the third quarter of 2022. Continued strong performance through an extended weak transactions market is an important accomplishment that demonstrates the underlying characteristics of our business and is a proof point for our broader strategy. Namely, continuing to evolve toward a profitable recurring sales mix, aggressively managing our cost structure, and being disciplined stewards of capital. Consistent with our performance last quarter, our software offerings delivered another quarter of higher sales growth compared to recent trend. Total software solutions net sales grew approximately 7% on an organic basis versus the third quarter of 2022. Third quarter software solutions net sales growth was led by ArcSuite and Venue, which grew approximately 13% and 9% respectively. Software solutions made up 40.7% of total third quarter net sales, an increase of approximately 390 basis points from last year's third quarter. On a trailing four-quarter basis, software solutions net sales of approximately $288 million represented 36.5% of total net sales, an increase of approximately 480 basis points from the third quarter 2022 trailing four-quarter period. Our third quarter performance reflects the strength of our recurring regulatory and compliance offerings. These offerings, which span across both software solutions and tech-enabled services, serve the compliance needs of corporations and investment companies. As we continue to invest in our recurring compliance products, we will shift DFIN toward a higher mix of profitable recurring revenue, and more importantly, benefit from the financial profile associated with such a recurring revenue model. One key component of our recurring revenue base is our compliance and regulatory-driven software products, which include Active Disclosure and ArcSuite. Each possess the characteristics of traditional enterprise software offerings with a high component of recurring subscription revenue as well as long-term contracts. During the third quarter, these recurring compliance software offerings grew 8% in aggregate versus the third quarter of last year and accounted for approximately 60% of total software solutions net sales. As discussed previously, we are building a cloud-native unified compliance platform that enables shared features across Active Disclosure and ArcSuite, providing foundational capabilities such as composition, tagging, filing, and regulatory and financial reporting into a single solution, while also maintaining market-specific capabilities within the individual products. This platform, in conjunction with our deep domain expertise, allows us to better serve recurring regulatory and compliance use cases under current and future regulations, and also provides us the ability to expand our current SEC-oriented addressable market into adjacent markets and use cases not served by us today, facilitating future recurring revenue growth. As it relates to venue, historical demand in the data room market has been relatively stable, though can fluctuate based on underlying diligence activity taking place related not only to announced deals, but also to those unannounced, both public and private alike. In addition to this market's resilient demand, product enhancement and strong sales execution have also contributed to venue's steady performance, all of which promote more consistent top and bottom line performance for DFIN. DFIN remains focused on driving profitable recurring revenue growth, A key source of the growth will come from regulatory and compliance opportunities which have a recurring demand profile, such as the Tailored Shareholder Reports regulation that will come into effect in July 2024. We continue to make great progress in our technology development and go-to-market plans. In mid-October, we achieved an important milestone in our readiness by launching the alpha release of our Tailored Shareholder Reports module that integrates with the financial reporting functionalities of our Arc Reporting SaaS offering. This newly introduced SaaS capability is just one component of our end-to-end solution, which also features our industry-leading tech-enabled services and print and distribution offerings. Our full platform solution enables DFIN to adapt to the way our clients wish to work, from self-service, full service, or a combination of both. We are encouraged by the positive market response to our solution and have started onboarding clients onto the platform. We expect tailored shareholder reports will benefit each of our software, tech-enabled services, and print and distribution offerings. We are currently working to refine the estimated benefits and look forward to providing further details on our February earnings call. As the global regulatory and compliance landscape continues to evolve, DFIN is well positioned to serve an increasing number of recurring compliance use cases, including ESG reporting. With the momentum building globally to adopt ESG measures, the increased level of recurring reporting and disclosure requirements is well suited for our active disclosure product. In the U.S., we are encouraged by the passing of two California state bills in September. which will require private and public companies operating in California to publicly disclose greenhouse gas emissions by 2026. California is the first state to mandate a robust ESG data collection and disclosure framework. We expect the SEC to follow suit and enact broader national level ESG regulations in the near future. In the EU, ESG reporting will become mandatory in 2025, as part of the corporate sustainability reporting directive adopted by the European Commission. By leveraging the functionalities of our active disclosure platform and integrating capabilities from our ecosystem of leading ESG data partners, DFIN offers a robust ESG solution, ready to fulfill upcoming U.S. and EU-specific ESG regulations. We look forward to further expanding our recurring revenue growth with this solution. Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our third quarter results and our outlook for the fourth quarter. Dave?

Thanks, Dan, and good morning, everyone. As Dan noted, we delivered solid third quarter results in a challenging environment, including strong year-over-year increases in adjusted EBITDA and adjusted EBITDA margin. We posted approximately 7% organic growth in our software solutions net sales, including approximately 8% sales growth in our recurring compliance software products, all while continuing to drive operating efficiencies and expanding adjusted EBITDA margin to 27.4%. On a consolidated basis, total net sales for the third quarter of 2023 were $180 million, a decrease of $8.7 million, or 4.6% on a reported basis, and 4.2% on an organic basis from the third quarter of 2022. Despite a modest sequential improvement in the level of capital markets transactional activity in the third quarter, the overall transactional environment remained weak. In the third quarter, the capital markets transactional business, which was down $8.8 million or 15% versus the third quarter of 2022, once again accounted for more than all of the year-over-year sales decline. The decline in capital markets transactional sales, as well as lower sales related to capital markets compliance activities, were partially offset by growth in software solution sales, which increased $3.7 million, or 5.3% on a reported basis, and 6.8% on an organic basis compared to the third quarter of last year. Third quarter adjusted non-GAAP gross margin was 60.6%, approximately 510 basis points higher than the third quarter of 2022, primarily driven by the impact of cost control initiatives and the growth in software solution sales, partially offset by lower capital markets transactional activity and incremental investments to accelerate our transformation. Adjusted non-GAAP SG&A expense in the quarter was $59.7 million, a $0.2 million increase from the third quarter of 2022. As a percentage of net sales, adjusted non-GAAP SG&A was 33.2%, an increase of approximately 160 basis points from the third quarter of 2022. The increase in adjusted non-GAAP SG&A was primarily driven by incremental transformation-related investments, and higher bad debt expense, partially offset by the impact of cost control initiatives and a reduction in selling expenses as a result of lower transactional sales volumes. Our third quarter adjusted EBITDA was $49.4 million, an increase of $4.1 million, or 9.1%, from the third quarter of 2022. Third quarter adjusted EBITDA margin was 27.4%, an increase of approximately 340 basis points from the third quarter of 2022, primarily driven by the impact of cost control initiatives partially offset by lower capital markets transactional sales and incremental investments to accelerate the company's transformation. Turning now to our third quarter segment results, net sales in our capital markets software solution segment were $46.5 million, an increase of 4.4% on an organic basis from the third quarter of last year. Net sales of our recurring compliance product, Active Disclosure, grew approximately 4% in the third quarter. During the quarter, we made continued progress to expand the adoption of Active Disclosure. With the decommissioning of the legacy AD3 platform and associated customer churn behind us, we achieved an increase in net client count for the first time this year during the third quarter. Our efforts to increase the value of Active Disclosure Platform has generated nearly $130 million of cumulative subscription contract value sold on new AD. More importantly, this increased value has resulted in our average subscription value per client to increase by approximately 13% from the third quarter of 2022 and is up over 40% from the second quarter of 2020 prior to the launch of new AD. Net sales of our virtual data room offering venue were up $2.2 million or 8.7% compared to the third quarter of last year, driven by increased room activity and higher pricing. As Dan noted earlier, Venue's performance has remained stable, which is a testament to the strong recurring demand for our virtual data room platform, as well as our sales execution. Adjusted EBITDA margin for the segment was 25.6%, an increase of approximately 310 basis points from the third quarter of 2022, primarily due to higher sales and cost control initiatives, partially offset by incremental investments in technology development. Net sales in our capital markets compliance and communications management segment were $70.1 million, and a decrease of 16% on an organic basis from the third quarter of 2022, primarily driven by lower capital markets transactional activity. As we anticipated, the level of capital markets transactional activity in the third quarter improved modestly from the second quarter and remained well below last year's level albeit at a lower rate of decline than we experienced in the first half of the year. While the outlook for capital markets' transactional environment is uncertain, including negative impacts stemming from a potential government shutdown, BFIN remains very well positioned to capture a significant share of future demand for transaction-related products and services when market activity picks up. Capital markets compliance revenue was down $4.4 million, or approximately 17%, versus the third quarter of 2022. While our capital markets compliance offering, which supports our corporate clients with their ongoing compliance needs, is mostly recurring in nature, a component of it is event-driven, including certain 8K filings and special proxies, which can fluctuate from period to period. This year's third quarter net sales decline was driven by a lower volume of event-driven special proxies, as well as timing shifts of certain client filings, which were completed and recognized in the third quarter last year, but were completed and recognized in the second quarter this year. Adjusted EBITDA margin for the segment was 37.9%, an increase of approximately 730 basis points from the third quarter of 2022. The increase in adjusted EBITDA margin was primarily due to cost control initiatives partially offset by lower sales volumes and higher bad debt expense. Net sales in our investment company software solution segment were $26.7 million, an increase of 12.7% or 11.4% on an organic basis versus third quarter of 2022, primarily driven by growth in subscription revenue as a result of the continued strong adoption of ArcSuite within investment companies. In addition to the subscription revenue growth, we realized higher services and support revenue in the third quarter related to a regulatory-driven filing in the EU that was one time in nature. We expect a more normalized growth rate in the fourth quarter. We are encouraged by the performance of ArcSuite in the third quarter and remain well positioned to capture opportunities from regulations such as tailored shareholder reports to drive future recurring revenue growth. Adjusted EBITDA margin for the segment was 37.1%, an increase of approximately 760 basis points from the third quarter of 2022. The increase in adjusted EBITDA margin was primarily due to operating leverage on the increase in sales and cost control initiatives partially offset by higher product development and technology investments in support of growth opportunities. Net sales in our investment companies compliance and communications management segment were $36.7 million, an increase of 2.2% from the third quarter of 2022, driven by higher transactional revenue, primarily related to a large mutual fund special proxy project. Adjusted EBITDA margin for the segment was 34.1%, approximately 40 basis points higher than the third quarter of 2022. The increase in adjusted EBITDA margin was primarily due to the impact of cost control initiatives, including continued synergies from our print platform consolidation and higher sales volumes. Non-GAAP unallocated corporate expenses were $11.5 million in the quarter, an increase of $1.9 million from the third quarter of 2022, primarily driven by an increase in expenses aimed at accelerating our transformation, partially offset by the impact of cost control initiatives. Free cash flow in the quarter was $61.3 million, a decrease of $7.4 million compared to the third quarter of 2022. The year-over-year decline in free cash flow is driven by higher capital expenditures related to investments in our software products and underlying technology to support them and higher restructuring and interest payments partially offset by an increase in adjusted EBITDA. We ended the quarter with $165.9 million of total debt and $154.2 million of non-GAAP net debt, including $41.5 million drawn on a revolver down from $95.5 million drawn at the end of the second quarter. From a liquidity perspective, we had access to the remaining $257.5 million of our revolver, as well as $11.7 million of cash on hand. As of September 30th, 2023, our non-GAAP net leverage ratio was 0.8 times. As a reminder, our cash flow is historically seasonal, generating more than all of our free cash flow in the second half of the year. Regarding capital deployment, we repurchased approximately 310,000 shares of common stock during the quarter for $14.8 million at an average price of $47.77 per share. Year to date through September 30th, we've repurchased approximately 387,000 shares for $18 million and an average price of $46.53 per share. As of September 30th, 2023, we had $106.3 million remaining on our $150 million stock repurchase authorization. Going forward, we will continue to take a balanced approach toward capital deployment. We continue to view organic investments to drive our transformation, share repurchases, and net debt reduction, each as key components of our capital deployment strategy and will remain disciplined in this area. As it relates to our outlook for the fourth quarter of 2023, we expect continued softness in the capital markets transactions environment due to macroeconomic headwinds and geopolitical factors. We expect consolidated fourth quarter net sales in the range of $160 million to $180 million and adjusted EBITDA margin in the mid-20% range. Compared to the fourth quarter of last year, the bid point of our consolidated revenue guidance, $170 million, implies a very modest year-over-year increase in net sales. I'll also provide a bit more color on our assumptions for the capital markets compliance and communications management segment. At the midpoint of our sales range, we assume transactional sales of approximately $50 million. In addition, and related to my earlier comments regarding the impact of the transactional environment on certain compliance filings, most notably special proxies and 8Ks, Our fourth quarter estimate assumes a modest year-over-year decline in our compliance-based sales within this segment. With that, I'll now pass it back to Dan.