Q1 2020 Earnings Call
Business highlights as well as updates regarding the Fccs rule 33, as well as our longer term objectives.
Dan.
Thanks, Dave moving to our first quarter business highlights in capital markets active disclosure had another solid quarter again, adding new clients at a steady pace venue launched its data privacy tool for transactions and corporations, which can search for pie or personally identifying.
Commission and REDAPT, the information, making it ideal for use cases involving GDPR and the California consumer Privacy Act.
With the Bravia, we helped our clients automatically identify hundreds of different provisions in their contracts, including force majeure events of default in terminations speeding up contract review by 30% to 90%.
Elsewhere in capital markets, well first quarter global transactional performance was mixed market share remains solid and despite the near term transactional headwinds, we expect to see related to cobot 19, our transactions pipeline is building nicely for what we would expect to be stronger active.
City later in the year.
Switching to investment companies.
Our reporting continued its growth in Europe, winning a multi year contracts to provide financial reporting software to RBC in Luxembourg.
Swear our pro continued its recent sales momentum with six more wins in the quarter as we continue to see strong demand for back office software to help our clients drive out costs and automate regulatory compliance workflows.
Lastly, as Dave mentioned earlier, we launched arc regulatory our global regulatory platform. It in January as.
As regulatory requirements continue to ship globally, the need to consolidate reporting solutions has never been more critical arc regulatory offers a full suite of cloud based reporting solutions to meet the complex regulatory demands.
Next I would like to provide a bit more context to the upcoming FCC rules 33 regulatory change and associated manufacturing platform optimization initiative.
On our last earnings call, we discussed our efforts to take a broader look at client product and job profitability to optimize our platform given upcoming demand changes. Our analysis includes the mutual fund that variable annuity shareholder reports print and distribution work.
That will be reduced in January 2021. In addition to specific customer contracts and business lines that in the absence of the work related to 33 would no longer generate enough profit to justify maintaining our network of third party and internal printing.
Distribution capacity necessary to produce that work.
As such we have decided to terminate certain contracts and proactively refrain from accepting certain types of future printing and distribution production.
These actions aligned with our strategy to move away from lower margin print based revenue streams toward higher margin software and service based solutions.
Regarding the profit implications the impacted revenue is almost exclusively printing distribution in nature and generates much lower profit margins than our software solutions and tech enabled services offerings.
This means that we can shed this revenue will only modestly impacting profit in the process.
Our team has been working diligently to refine our planning and we now estimate that the total annual reduction in revenue will be in the range of $130 million to $140 million and the annual reduction the EBITDA will be in the range of $10 million to $15 million.
Starting in January 2021.
Further.
We expect these changes to have only a de minimis effect on our 2021 free cash flow as the after tax cash impacts from the reduction in EBITDA and restructuring charges are mostly offset by the associated working capital being freed up. We're currently working through the final details of our platform up in.
Position efforts and we'll provide more detail on the specific actions on or prior to our next earnings call.
I should also note that we do not expect these changes to have a meaningful impact on our 2020 results.
Further we continue to expect low to mid teens growth in our software solutions revenue and recognize that while we described the 33 regulatory driven reduction in print and its impact in isolation, even absent 33, each year, we face a decline in print for which we need to overcome by.
Growth elsewhere in the portfolio as well as cost management.
Moving next to an update on our longer term objectives in May of 2018, we hosted our first Investor day, where we introduced defund as a standalone company and communicated our strategic objectives, which included changing the revenue mix protecting our core markets and evolve.
During the culture.
We remain focused on growing our software revenue base by leveraging our domain expertise market position and strong sales and service organizations with a goal of 44% of our total revenue being derived from software solutions.
By 2024.
We believe that the focus on driving software revenue is the right strategy for both the company and investors as we have an opportunity to continue to serve our clients in the manner in which they desire to be served.
Well, our existing offerings at high incremental margins, well also introducing new offerings into our existing client relationships as we did with arc regulatory this quarter.
In addition to helping improve our overall margins the recurring nature of the software revenues will help stabilize and increased visibility of our quarterly and annual financial performance.
Similarly, maintaining our market leading position in FCC compliance filing for both corporations and mutual funds carries forward as an objective from 2018.
Our market leadership and strong customer relationships not only provide us with a steady base of annual business, but also give us the opportunity to introduce new offerings to our existing clients to help them solve an ever increasing set of compliance obligations.
From a culture perspective, we continue to merge the talent that we have post spin off with new leaders from the technology industry, who have infuse the culture with new ideas, helping to modernize our business at the same time retaining the industry expertise that makes defund a trusted partner.
We will execute on these strategic objectives, while also continuing to aggressively drive operating efficiencies and leverage our industry and regulatory domain expertise to assist clients and meeting their compliance obligations. Finally, I wanted to provide a few longer term financial objectives to help illustrate why we feel.
But our strategy will produce compelling returns for our shareholders.
Well the variability of our transactional offerings makes it difficult to provide consistent annual targets. Our current plan, which includes conservative estimates for transactional revenues and the introduction of products already in development.
As our 2024, adjusted EBITDA margin, increasing to approximately 20% representing an average annual increase of approximately 75 basis points.
In addition to the improved margin our current plan realizing the benefits associated with our consistent deleveraging and the opportunity to refinance our eight and a quarter 2024 senior notes producing average annual non-GAAP net earnings per share growth of approximately 15%.
With an opportunity to further increase this earnings per share growth through future share repurchases.
Given the shifting mix, we would expect low single digit organic revenue growth during 2022.
Free cash flow exceeding $60 million in 2023 and zero net debt in 2024.
Again, the capital allocation policy for modeling purposes is that all cash builds and we achieve our plan organically.
We're very excited about the next chapter of our software led business transformation. We believe we have the client relationships and right strategy to deliver market, leading compliance solutions to our customers an excellent returns to our shareholders with that I'll turn it over to Dave to discuss our perspective on the balance of the year Dave.
Thank you Dan as we stated in this mornings press release, we have retract that our guidance for 2020.
In the absence of specific guidance, however, I would like to provide some guardrails for the year and also a high level outlook for the second quarter.
First the guardrails.
Over 60% of our business is recurring in nature.
Corporations and mutual funds are still required to comply with their ongoing SEC compliance obligations. So we expect this portion of our revenue to be mostly on effective.
Our transactional related revenue, including venue will certainly be impacted by the overall environment, but the magnitude and duration of the impact is very difficult to predict which is why retracted and are not updating our 2020 guidance until visibility improves.
As I've mentioned, often previously our transactional related revenue can be challenging to forecast and more stable environments and the current macro environment makes it much more so.
To add some context upsize revenue for our transaction related revenue, including venue in the last three quarters of 2019 was approximately $255 million nearly 40% of our total revenue for the last three quarters of 29 team.
Meanwhile, we continue to aggressively manage our cost structure to mitigate as much of the impact to our bottom line as possible.
And as the market leader in transactional filing we remain well positioned to capture transactional revenue and profit growth when market conditions returned to a more normalized level.
Other items that we feel we have enough visibility to comment on include depreciation and amortization, which we continue to expect to be approximately $55 billion.
Interest expense, which we expect to be approximately $30 million, reflecting the partial year benefit of retiring a portion of our eight in the quarter notes.
Partially offset by higher revolver balance.
Regarding capital expenditures, which we previously expected to be approximately $35 million. We now expect to be in a range of 30 million to $35 million in light of the current situation in our end markets.
Full year fully diluted shares are expected to be approximately 34.5 million assuming no additional share repurchases.
Lastly for the second quarter, we're expecting next sales to be in the range of $220 million to $230 million down approximately 13% year over year at the midpoint.
Due largely to the impact of covert 19 on our transactional and venue offerings.
Again for size context, these offerings generated approximately $90 million of revenue in the second quarter of 2019.
Regarding profitability.
We expect our second quarter non-GAAP adjusted EBITDA margin to be in the range of 16% to 17%.
Down approximately 500 basis points from the second quarter of 2019.
Due to the expected lower level of transactional activity, partially offset by the impact of our ongoing cost savings initiatives.
I'll now turn it back that Dan before we open it up for QNX.
Thank you Dave in closing I want to thank the deepen employees around the world who have been working tirelessly to maintain our business operations and ensure our clients continue to receive the highest quality service without disruption you.
Your efforts have been inspiring stay safe and healthy operator, we're ready for questions.
As a reminder to ask a question. Please press star one on your telephone keypad again that star one to ask a question.
And our first question is from Charlie Strauzer with CJ adds. Please go ahead.
Hi, Good morning, hope are the ones well and safe there.
Thank you Charlie you too.
Couple of just quick questions on the 33, thank you for the additional color.
On a vacation there just as we think about next year the ramp of that.
$130 million to $140 million decline in revenue.
How should we think about the ramp up that over the course of the year.
Sure, Yes, so I'll start off and.
And Dave can jump in as well so.
The regulation kicks in in January and just as background.
And allows mutual funds and variable annuities to distribute their shareholder reports electronically by default rather than by option.
And then the balance is other clientworks that that we're exiting.
So when we think about organizationally, our content management software and service organization role is unchanged.
Our system continues to manage client content and financials after FCC filing and shareholder viewing.
As we've said previously for printing distribution, we have our own assets and then we also rely on the trade. So the team's been planning for options in light of the volume demands and including secular trends in printing.
As we designed it platform, both internal and external to serve our needs.
So when we look at the financial impact as you are familiar on the the print side a lot of the revenue here is.
Pass through materials paper paper and ink, primarily that's 100% variable and fluctuates with volume beyond that we get into addressing are designing the network to serve our needs.
As I mentioned in my prepared remarks, the from a strategic perspective, we're excited it accelerates the strategy and delivering the 44% of our revenue from software by 2024.
Great. Thank you for that and.
Looking kind of or near term, but you know there's been a lot of talk in the news about the companies doing good offerings follow on equity offerings et cetera. It's a short their balance sheets are you seeing some of the benefit of that and what is kind of baked into that that.
That forecast for Q2 that you gave out.
Sure, Yes, so let me let me start I'll take the broader.
Guidance view and then Dave if you want to jump in as well so.
As Dave said about 60% of our revenue is recurring driven by compliance requirements within both.
The corporate and the fund space that works predictable.
Within software and non software segments. The mix of the same roughly 60% of our software revenues derived from recurring requirements.
The balance of the work as you highlighted is driven by transactions, including the venue data room.
Within transactional offerings, our total filings are actually up year to year.
However, the mix began to change.
In the last half on March and into April so transactions that more market sensitive IPO is M&A spin.
Were reduced and product lines, such as debt issuances were markedly higher.
In the short term, we'd expect the disruption given market events until advisors in companies have a clear view on valuations.
The market stabilizes and that ample liquidity as maintained in the market. So as that happens we're bullish on M&A.
In the medium and long term.
Regardless of the level that defines the new normal.
Theres tremendous amount of dry powder to be deployed valuations have in some spots come down and all we will find their level.
And we would expect favorable low interest rate environment.
And access to financing.
As well as some of the underlying dynamics of digital transformation technological disruption et cetera to continue.
In terms of Dave's comments on Q2, and I'll, let him jump in here in a minute.
The one thing I would say is as we've seen with transactions. They can dry up relatively quickly and they can also restart relatively quickly.
Our overall business has seasonality to it roughly 60% of our activities in the first half of the year.
Driven largely by client compliance schedules.
And in the meantime, we've remained aggressive on the cost side.
Despite shrinking revenue, we've expanded margins over the past three quarters.
We will continue to be disciplined as it relates to capital deployment and.
Be opportunistic as we think about the balance sheet as well so Dave you want to jump in more specific to the Q2 question.
Yes sure.
Charlie just on Q2, as we look at the transactional pipeline.
Have identified.
Transactions that are.
Significant size the pipeline is actually.
A little bit better in terms of the number of deals than where we were a year ago. At this point I think the big question for US obviously is what the current macro environment, how long or how impactful but over 19.
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Impact on the overall market will continue to be and so we're optimistic as Dan said about the pipeline building and the fact that.
We are hopeful these will come back later in the year come to market later in the year. It just from a timing perspective tough to predict but the other comment I would make with respect to your question around debt offerings, we've certainly seen that activity there and get.
Our fair share of that work, but from an deal value size.
As we've talked about the past certainly IPO in M&A are more valuable.
From an overall.
Size a deal then then debt offerings are.
That's fair Thank you very much.
Charlie.
And your next question is from Peter Heckmann with Davidson Company. Please go ahead.
Good morning, guys. This is electric on supporting Alexis.
Good morning. Thank you for all of the incremental detailed definitely very helpful. I also wanted to touch on 33 70 estimated loss from printing is about double what you had said at Investor day in 2018, I think it with 70 million at the time, but EBITDA reduction is essentially staying the same so I'm, hoping you can provide a bit more in detail on assumptions.
Going into this and then really how much of that is 33 and how much of it is practically terminating contracts.
Sure. Thanks, So so theres a couple of a new components as you highlighted.
The overall revenue impact about doubled that profit impact about the same.
In addition to.
Funds shareholder reporting we've also assume variable annuity shareholder port reporting will go electronic as well.
And then we've we've taken the assumption and actions on some client contracts.
So as we think about as I mentioned, the the the revenue in the composition of costs Theres, a high content of variable costs.
And then as we think about our platform both internally managed as well as in the trade.
We've just been able to do more work.
And refine those numbers and get to a a better spot in terms of mitigated the impact so roughly half the margin impact that we thought it would be.
Originally and.
I was where.
We're excited about the prospect because it does help us accelerate.
The the transformation of the company into a much more.
Software in Tech enabled service mix of revenue and Dave I don't know if you. Some then.
Yes, Alex this I would just say when we when we look at the the overall cost structure in terms of.
Our ability to.
Move work.
Either out of the trade at a at a lower cost and move them onto our own assets or take additional fixed cost side of the platform.
That that Dan mentioned in his prepared remarks.
It really the combination of those two things are what <unk> has has allowed us to.
You don't have a have a better better visibility into the level of profitability.
Being more aggressive on the cost control side to maintain the profit impact that we had projected initially.
And just see yes, just the no one AD is that the majority of the reaction is is.
Regulatory driven.
And the VA.
In summary was moved into 2021, so that was originally contemplated to be further out.
Okay. Thank you for that and that was nicely to entice. That's my next question, which is why not you could quantify the expense savings in the quarter and and how much of the cost cutting initiatives would you consider sustainable.
Yes, Alex so I'll take that one we haven't quantified specifically the amount of cost savings in the quarter, we talked about.
Equally over the quarters through the last.
Last handful years cost reduction is.
And ongoing aspect here.
Dan mentioned in his prepared remarks that that even absent regulatory changes, we still face headwinds on the secular decline related to print.
And.
Are always looking at cost reductions I think the the cost reductions related to 33.
Our not yet in place and so while we have the plans and ready to.
Execute as appropriate.
That would be unit in addition to kind of the normal cost mitigation efforts.
Yes, the only thing I'd add to that this is Dan is that.
These are sustained cost savings and in some of it.
Company needs to look like and.
Mendis job by.
The everyone within the company thinking of of ways of doing business differently and driving efficiencies throughout the company at all levels.
Understood. Thank you and then one last one for us.
So on the capital markets transactional side, it sounds like you're talking about review that IPO transaction.
Switch coresite that leads to venue trends have you seen any improvement in April that maybe leadings here more bullish outlook on M&A in the medium and long term.
Yes, yes, one comment so then I'll I'll I'll jump in and start and then Dave.
So.
As we think about the market and in comparison to last year certainly last year. We had the FCC was closed for the first month or so so it was a pretty pretty light IPO environment and then.
We did see the impact of.
The virus early on coming in the Asia Pacific region.
Thankfully, we've seen some of that rebound as as as the viruses has moved on from that region. So yes, I think when we when we think about that you know IPO is were up a little quarter to quarter, but when we look at March and April activity levels.
It doesn't look so good and then obviously in the M&A arena.
Was a pretty soft quarter.
Actually worldwide, so both domestic and international.
And the good news there is as I mentioned in my comments I think there's the Charlie's question I think theres a lot of dynamics out there that would foreshadow a better M&A environment as things stabilize.
Okay.
Then Dave you want to add.
No Dan you covered what I was going to say thanks.
Hi, Thanks, so much they say thank you yep yep.
And your next question is from a rise Sharma with Donnelley financial Please go ahead.
Hi, good morning, guys.
A couple areas I just wanted to touch on so you mentioned that the guidance. This year, there's no material change from 33, obviously that's.
Let's start since the beginning of the new year.
And also you said free cash flow impact in fiscal 2001 would be immaterial Oh from 33 is that correct, but because of the working capital.
Savings that's correct.
Great. So.
Okay and then.
The SAS offerings, what was the overall number the percentage of the business.
Well what is assess now as a percentage of the business and what was the overall growth year on year I know that fund suite.
Are up in double digits.
Yeah, right. So our overall growth was 5.6%.
And.
In terms of the.
Total.
Revenue of the portfolio that it represents I think if you just take the to the two software solutions segments that you get to the number that you're looking for.
Yes, just over 21% or so.
Got it.
Thing I think Thats all from my questions. Thank you.
Great. Thank you.
And your next question is from Richard Sosa Investor. Please go ahead.
Hi, Good morning, Thanks for taking my call I'm, just I am a individual investor in and I do I did want to congratulate you on on buying back so much your debt you, where you rarely see that from companies 66 million.
At that discount to par with his or her makes me makes me very happy I know you could probably can't comment on April, but where are you able to continue to begin the into debt markets. I noted the bonds are still trading a discount that's something you can discuss or are we have to wait yes, that's not something that we would comment on.
Okay and second questions are looking into 2021 and 2022.
Yes.
Is there like a kind of if all else being equal Tonight I mean, we're seeing maybe something like 750 780 can include sales is that kind of.
What else would be thinking about or is it is a little bit higher or lower.
Yes, so we haven't given specific guidance there on the out years I think you know you can start to get at the pieces right. We still expect the software revenue to grow as we've indicated.
I think if you do the math on the impact that we talked about in terms of 33 and some of the.
Contracts that were exiting and then the secular decline on print.
You should be able to get.
Pretty close to what our estimates would be obviously the big.
The big variable would be.
Transactional related work.
In both the capital markets.
[noise] communications compliance and communications management as well as the venue portion of capital market software solutions.
Those are the pullback in sales for 33 should should take like a year right to kind of fully.
The way. So it was just thinking that can be all at once corrects gonna be over a year it'll be throughout throughout 2021.
Okay. There are 2021, Okay, and then as that happens or are there any further asset sales, who could expect I'm you know selling of a print at the printer or anything like this or is that most of that has been done already.
Yes, again wouldn't comment on any specific asset sales.
Other than to say, we're always looking at AD.
You know monetizing things that we can you've seen us do some transactions in the past where we generated cash.
We're always looking at at ways to get the best value from our assets, but.
Don't have any specific comments on that.
And my last question and Ah, Yes. It would you buying so much of that 300 million dollar term debt is there any chance to see a refinance prior to the October call date or is that the out of the question is you can't take out of personal debt to them.
The further pay that off correct.
Yeah again wouldn't comment on any specific transactions that we are contemplating are not contemplating.
You know obviously a lot of its driven by market conditions that no is callable.
October of next year at one or two but.
But beyond that wouldn't say anything about any refinancing plans.
Okay, perfect and I. Appreciate you guys, taking my call and great quarter, I again, I love It got being so aggressive with that and stock. Thank you and I really appreciate that.
Thank you.
Thank you.
And as a reminder to ask a question simply press star one on your telephone keypad.
We have no further questions at this time.
Okay. Thank you very much and thank you everyone for joining we look forward to.
Seeing you if not in person virtually in the near future and thanks again for your interest.
Thank you again for joining US today. This does conclude today's conference call you may now disconnect.
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