Donnelley Financial Solutions Inc

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelly Financial Solutions fourth quarter 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 then the number one on your telephone keypad. To withdraw your question, press star one again. I would now like to turn the conference over to Mike Zhao, head of investor relations. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining Donnelly Financial Solutions' fourth quarter and full year 2025 results conference call. This morning, we released our earnings report, including a set of supplemental trending schedules of historical results, copies of which can be found in the investors section of our website at defense solutions dot 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 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, and other members of management. I will now turn the call over to Dan.

Thank you, Mike, and good morning, everyone. We finished 2025 by delivering strong fourth quarter results, highlighted by 10.4% consolidated net sales growth, year-over-year growth in adjusted EBITDA, and strong adjusted EBITDA margins. Double digit growth in both our software solutions and event driven transactional offerings were key components of our strong top and bottom line performance. In addition, given our stock trading levels, strong balance sheet and perspective on long term value, we accelerated our share buyback during the fourth quarter and repurchased approximately 1.3 million shares, bringing the 2025 total share repurchase to approximately 3.6 million shares. or approximately 12% of the company's outstanding shares from the beginning of the year at an average price of $48.36 per share. As a result of focused execution, we grew consolidated adjusted EBITDA by $14.1 million, or approximately 44% year over year, and delivered an adjusted EBITDA margin of 26.6% in the quarter, an increase of approximately 630 basis points, from last year's fourth quarter. Our fourth quarter performance is a further validation of our strategy. Reflecting on the full year of 2025, against the backdrop of continued economic volatility, we delivered strong full year results, including software solutions, net sales growth of 8.7%, growth in adjusted EBITDA, record adjusted EBITDA margin, and higher free cash flow compared to full year 2024. While 2025 marked another year of decline in our transactional revenue, the fourth consecutive year of decline, our strong execution enabled us to deliver consolidated adjusted EBITDA of $239.8 million, an increase of $22.5 million, or 10.4% year over year, and consolidated adjusted EBITDA margin of 31.3%, approximately 350 basis points higher than 2024. For context, our 2025 full-year adjusted EBITDA margin exceeded the previous record, which was 29.7%, despite this year's significantly lower overall and transactional revenues compared to that year. Our long-term focused execution to improve our sales mix and manage our cost structure has resulted in DFIN becoming structurally more profitable, creating the financial flexibility to balance investment in our transformation with smart capital deployment. While transformational implementation continues, 2025 also marks the end of Chapter 2, or the fundamental transformation chapter of our journey as an independent company, a phase that started in 2020. Specifically, during Chapter 2, we transformed many areas of the company, simplified and improved our business processes, installed more robust tooling across the organization, and increased development velocity to bring new solutions to market more efficiently. all aimed at creating significantly improved client experience while increasing value for our clients, employees, and shareholders. Our performance in 2025 demonstrates much of our progress within Chapter 2. Let me highlight a few of those examples. First, one of the fundamental aspects of our strategy has been the continued transformation of sales mix by increasing the adoption of our software solutions while continuing to serve the market where desired by clients, with our tech enabled services and print and distribution offerings. Our 2025 performance further demonstrated the progress of that strategy. For full year 2025, we delivered record software solutions net sales of $358.4 million, an increase of 8.7% from 2024, resulting in software solutions comprising approximately 47% of our total full year net sales. Since our 2016 spinoff, we've grown our annual software solutions net sales by approximately $222 million, from $136 million to $358 million, representing an annualized growth rate of approximately 11%. At the same time, we've maintained a strong tech-enabled services offering and successfully managed the decline in print and distribution net sales, a decline driven by regulatory change our proactive decision to exit certain low-margin work, and the secular decline in the demand for printed materials. Our progress keeps us on the right path toward achieving our long-term financial goals. Let me share a few highlights that underpin the growth in our software solutions in 2025. First, we are encouraged by the sales growth in our recurring compliance products, active disclosure, and ARC suite, which increased by approximately 13% in aggregate. For active disclosure, sales increased by 17% for the full year, our highest annual growth rate since 2021. Since completing the product transition in 2023, we've realized sequential improvements in active disclosure's operating performance, including growth in net client count as well as higher value per client. This improved growth trajectory demonstrates that the upgrades we have made across the offering, including technology, services, and support, combined with strong sales execution, are delivering positive results. With a strong foundation and ongoing momentum, we expect active disclosure to continue to deliver solid growth in 2026. ArcSuite, our market-leading compliance software offering to mutual funds and other regulated investment companies, delivered solid full-year net sales growth of approximately 11%, in part due to the tailored shareholder reports regulation. Given the mid-year 2024 effective date, The TSR regulation primarily benefited our first half sales growth in 2025, while the second half growth in aggregate was more modest as we overlapped the impact of both TSR and a large client contract renewal. As I have stated previously, we expect the growth profile of ArcSuite to be more modest during periods outside of regulatory changes. While over the longer term still exhibiting the double-digit growth we have delivered historically, based in part on a dynamic and evolving regulatory environment. We are optimistic about the opportunities created by future regulatory change and believe ArcSuite is well positioned to capture additional demand from new regulations to further accelerate recurring software revenue growth. In addition to regulatory changes, ArcSuite is also well positioned to capture additional market-driven demand in areas such as private investments. We expect increased reporting and disclosure needs by private investment institutions, including hedge funds, private equity, and business development companies. Our newly launched financial and regulatory reporting offering, ArcFlex, positions deep and well to capture incremental opportunities in the private investment space. The initial release of ArcFlex has received positive response in the marketplace, and we expect a ramp-up in ArcFlex revenue starting in 2027. Turning now to Venue, as expected, the growth rate in 2025 was more modest compared to the approximately 26% growth we achieved in 2024, which was aided by several large projects. On a full year basis, Venue delivered approximately $142 million in net sales and grew approximately 3% versus full year of 2024. Importantly, Venue's year-over-year growth rate improved sequentially each quarter throughout the year, and we ended the year with positive momentum, having delivered approximately 20% growth in the fourth quarter. In addition, the rollout of new Venue which was launched in the third quarter, continues to gain traction in the marketplace. We are pleased with the ongoing commercial adoption of Venu and expect the upgraded product to contribute to Venu's overall growth in 2026. Next, 2025 was an important milestone in our product development efforts. Having introduced several new solutions to market, including the new Venu virtual data room, ArcFlex, our offering for alternative investments, and Active Intelligence, a suite of artificial intelligence capabilities within Active Disclosure designed to streamline compliance and reporting for companies. These new products introduced in 2025 are the latest in a series of new software introductions over the last several years, which also include new AD and within ArcSuite, total compliance management and the tailored shareholder report solutions. and are the result of our efforts to accelerate the modernization, innovation, and growth of our software portfolio. Over the past several years, these investments have enabled us to launch or modernize a majority of our software products. Our investments have enabled us to increase development velocity, bring new solutions to market more efficiently by leveraging the platform capabilities of our single compliance platform, and empower our clients to adapt quickly to an evolving regulatory environment. all while incorporating the most modern technology. Finally, in a business landscape that has become increasingly shaped by the adoption of artificial intelligence, DFIN is deploying AI across both our product offerings as well as our internal operations. As we continue to enhance our compliance platform, we are building an AI framework architecture designed to deliver increased value to our clients through improved efficiency and increased productivity. The AI capabilities embedded in active intelligence are a good example of the higher value we provide to clients. Specifically, during the initial rollout, select active disclosure clients have access to AI-enhanced capabilities for streamlining the research, comparison, and analysis of draft SEC filings against their own prior filings and those of selected peers. This capability will help to reduce risk and expedite the preparation of quarterly and annual reports, proxy statements, and IPO filings. As active intelligence and other AI features expand more broadly across the defense software platform, we expect more clients will benefit from increased efficiency and actionable insights. This enhancement is part of our end-to-end offering, ensuring clients benefit from both advanced technology and the human expertise required for mission-critical compliance. At the center of our approach is an unwavering commitment to security, privacy, and responsible data governance. For example, we never use client data to train large language models, and we architect our systems to ensure sensitive information is protected at every step. Internally, our investments in AI enable us to modernize our business operations by applying automation and AI-driven tools, including commercial AI solutions and our own agentic AI development to streamline workflows, improve productivity, and support profitable growth. One area where we are realizing meaningful benefits from AI is in product development, where improved processes and increased development velocity are enabling us to bring new solutions to market more quickly. These internal gains enhance the speed and quality of the solutions we deliver, allowing us to respond quickly to evolving regulatory compliance and client needs. As AI strengthens and expands our capabilities, The value DFIN provides, a unique combination of deep regulatory expertise, an excellent service model, and advanced technology, becomes more evident. We remain a responsible innovator and a trusted partner dedicated to delivering secure, dependable, and insight-driven solutions for clients' most important regulatory and compliance needs. Before turning it over to Dave, I wanted to provide a quick update on our operating priorities for 2026. In 2026, we will transition to Chapter 3, or the sustained growth chapter of our transformation. During chapter three, we will continue to realize benefits from our revenue mix shift and historical investments that have resulted in a strong foundation for continued innovation and growth. With revenue from occurring and reoccurring offerings approaching 80% of our full year total revenue and the remaining approximately 20% being event-driven, we expect the evolution of our revenue profile towards a higher mix of predictable revenue to continue going forward as we accelerate the growth in our recurring and reoccurring offerings while benefiting from but being less dependent on event-driven revenues. These dynamics result in sustained profitable revenue growth. We look forward to driving value creation by delivering predictable, consistent, organic top-line growth, continued strong profitability, and ongoing robust cash flow generation. Specific to 2026, our primary focus remains on accelerating our business mix shift by continuing to grow our recurring SAS revenue base while maintaining share in our core traditional businesses, including transactions. We are encouraged by the momentum in capital markets transactional activity so far in the year and remain well positioned to capture an uptick in deal activity. In addition, we expect print and distribution to continue to decline as a result of the long-term secular reduction in the demand for printed products Though at approximately 14% of our 2025 total net sales, the magnitude of the reduction will be more than offset by the growth in software solutions next sales. Further, as it relates to regulatory change, we do not expect major SEC rule changes for 2026. That said, our historic and ongoing investments in our regulatory and compliance software platform positions us well to capture the demand from future regulations and non-SEC use cases. In addition, we will continue to aggressively manage our costs and drive operational efficiencies, part of which will be enabled by the increased adoption of artificial intelligence productivity tools. Finally, we will maintain our disciplined approach to investments and capital allocation in our pursuit of profitable growth opportunities to maximize financial return and create long-term value. I'm confident with our continued focus on executing our strategy, we will create increased value for our clients, employees, 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 fourth quarter financial results and outlook for the first quarter of 2026.