Q3 2020 Donnelley Financial Solutions Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to <unk> financials, Phil Jones, but <unk> and conference call.
Time, all participants' lines <unk>.
After this because this is Sean there will be a question on sufficient.
Ask a question during the session you will need to press star one on the telephone.
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I would now like to Honda conference over to you because to be Justine Ricci.
The president.
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Thank you good morning, everyone and thank you for joining the Donnelley financial solutions third quarter 2020 results Conference call. This morning, We released our earnings report a copy of which can be found in the investors section of our website a deacon solutions that count during this call. We'll refer to forward looking statements that are subject to uncertainty.
For a complete discussion please refer to the cautionary statements included in our earnings release and further detailed in our annual report on form 10-K quarterly report on form 10-Q, and other filings with the SEC further we will discuss non-GAAP financial information. We believe the presentation of non-GAAP financial information provides you with useful supplementary information concerning the company's ongoing operate.
Okay.
And is an appropriate way for you to evaluate the company's performance.
We are however provided for informational purposes only please.
Please refer to the earnings release and related tables for GAAP financial information and reconciliations of GAAP to non-GAAP financial information Andrew.
During this morning by Dan lead Dave Gardella, Katie Turner, and Tom, Yes, I'll now turn the call over to Dan.
Thank you Justin and good morning, everyone from all of Us to deepen we hope that you and your families are staying safe and help.
Im very pleased with the company's performance for the quarter, which included both a return to more normalized levels of growth in software sales.
And a significant increase in transactional activity driven by a robust IPO market.
The influx of higher margin Tech enabled services and software solutions net sales our proactive pruning of low margin print work along with the significant impact of our ongoing cost control efforts resulted in third quarter non-GAAP adjusted EBITDA margin of 22.7%.
An improvement of 680 basis points from last year's third quarter total.
Total sales were up nearly 7% from last year's third quarter as the pickup in IPO activity that began in June accelerated in the third quarter boosting sales across our transactional offerings globally strong capital markets transactional market activity and robust market share performance resulted in overall trends.
Actual sales growth this quarter, the first quarter of year over year growth since the third quarter of 2018.
Software solution sales totaled $51.1 million marketing, an all time quarterly record for decent.
The sales growth in software solutions of 10% was more in line with our historical growth rate led by the recurring compliant products, primarily funded suite Ark and active disclosure growing a combined 12.7%.
In addition, our data room product venue achieved an all time high for quarterly sales.
And grew by 8% year over year, its highest growth quarter since the fourth quarter of 2018.
This growth was largely driven by an increase in announced M&A deal activities starting late in the quarter combined with the strong IPO environment.
The additional steps we took earlier this year to optimize our operations, including streamlining our organizational structure and real estate footprint are reflected in our third quarter performance and contributed to the 53% increase in adjusted EBITDA from the third quarter of 2019.
Our increased profitability combined with lower interest expense from our consistent deleveraging led to a significant increase of 50 cents per share in third quarter non-GAAP net earnings.
These results in conjunction with diligent management of working capital led to free cash flow of $67.6 million in the quarter $15.4 million higher than the third quarter of 2019.
At quarter end, our net debt was lower than last year by $81 million, resulting in net leverage of 1.5 times.
A full turn lower than the third quarter of 2019.
We are now well below our targeted leverage range, providing considerable financial flexibility and liquidity in the current and ever changing economic environment.
The execution of our strategy is delivering positive results, we have delivered year over year expansion in EBITDA margins for five consecutive quarters, demonstrating not only the positive impact of aggressive cost management, but also the continued improvement in our business mix over these five quarters, our sales have decreased by.
$31 million non-GAAP adjusted EBITDA has increased by $34 million EBITDA margin has expanded by 440 basis points and free cash flow has increased by $74 million. Moreover, the $31 million decrease in sales as the combination of a 54.
$4 million decrease in print related sales, partially offset by $14 million of growth in our software solution sales and $9 million the growth in our tech enabled service or sales.
The trends in our results reinforce the value of our 44 and 24 strategy, specifically targeting 44% of our sales from software solutions by.
By the year 2024, driven by increases in our software solutions and Tech enabled services sales and decreases in print sales driving margin expansion and continued strong cash generation.
Before I share a few additional updates I would like to turn the call over to Dave to provide more detail on our third quarter financial results and our outlook for the fourth quarter Dave.
Thank you Dan and good morning, everyone.
As Dan mentioned, we delivered very strong third quarter results, including significant year over year increases in non-GAAP adjusted EBITDA non-GAAP adjusted earnings per share operating cash flow and free cash flow, we maintained strong market share and our transactional filing business and grew our software.
In sales all while continuing to focus on driving operational efficiencies.
These efforts resulted in a 680 basis point improvement in our third quarter non-GAAP adjusted EBITDA margin compared to the third quarter of 2019 further extending the trend we established in the second half of 2019 and further demonstrating the strength of our business.
On a consolidated basis net sales for the third quarter of 2020 were $209.5 million, an increase of $13.6 million or 6.9% from the third quarter of 2019 software solution sales in the third quarter increased by four point.
$5 million or 9.7% compared to the third quarter of 2019, primarily due to increased fund activity and product adoption within fund suite Ark and acceleration of room activity in venue.
As well as solid subscription growth in active disclosure and price increases in our other compliance software offerings Tech enabled services sales increased by $20.6 million or 24.6%, primarily due to increased capital market transactional and compliance activities.
Britain distribution revenue decreased by $11.5 million or 17.6% price.
Primarily due to lower demand for printed materials with investment markets, including less commercial printing, where we have proactively exited certain low margin contracts rightsizing our production footprint in advance of the anticipated reduction in print demand related to the regulatory changes from group.
33, and 498 a third.
Third quarter non-GAAP gross margin was 46.4% or 830 basis points higher than the third quarter of 2019, primarily driven by favorable business mix featuring higher margin Tech enabled services and software solution sales combined with lower overall print volume and the.
Impact of ongoing cost control initiatives, partially offset by an increase in incentive compensation expense associated with the strength of our financial performance.
Non-GAAP SGN a expense in the quarter was $49.7 million $6.2 million higher than the third quarter of 2019.
As a percentage of sales non-GAAP best today was 23.7% an increase of approximately 150 basis points from the third quarter of 2019.
The increase in non-GAAP EPS DNA is primarily due to the increasing sales changes in the business mix higher incentive compensation and benefits related costs, partially offset by the impacts of ongoing cost control initiatives.
Our third quarter non-GAAP, adjusted EBITDA was $47.6 million, an increase of $16.5 million or 53.1% from the third quarter of 2019.
Our third quarter non-GAAP adjusted EBITDA margin was 22.7% an increase of 680 basis points from the third quarter of 2019, again, primarily driven by the impact of ongoing cost control initiatives operating leverage on higher sales and a more favorable sales mix partially offset.
By increases in incentive compensation and employee benefits expense, turning now to our segment results net sales in our capital markets software solutions segment were $34.1 million in the third quarter of 2020, an increase of 8.3% from the third quarter of 2019, primarily due to it.
Creased venue data room activity continued growth in active disclosure subscriptions as well as price increases in our other compliance software solutions.
Venue sales increased 8% from the third quarter of 2019, driven by an improving M&A environment late in the quarter. While active disclosure also had a solid quarter non-GAAP adjusted EBITDA margin for the segment was 25.2% an increase of over 520 basis points from the third quarter of 2019.
The increase in non-GAAP adjusted EBITDA margin was primarily due to the operating leverage benefits on the increased sales as well as the impact of operating efficiencies, partially offset by higher incentive compensation expense net sales in our capital markets compliance and commune Communications management segment were 96.
$1 million in the third quarter of 2020, an increase of 16.9% from the third quarter of 2019, primarily due to increased capital market transactional and traditional compliance activity as Dan mentioned earlier. This quarter was the first time, we've seen year over year growth and transactional sales since the third quarter.
Of 2018 this growth was largely driven by the pickup in IPO activity that we saw starting in June which accelerated in the third quarter with IPO market pricings, nearly tripling from the third quarter of 2019.
Defund, gaining additional market share M&A filings remained slow in the third quarter as the pickup in announced deals. We saw in September has not yet resulted in a corresponding increase in M&A five.
Net related transactional activity remained solid, albeit not as robust as it was earlier this year and also provided a sales lift in the quarter.
Additional compliance sales were up in the quarter, primarily due to increased 8-K activity related to the new Fast Act mandate that went into effect for accelerated filers in the third quarter non-GAAP adjusted EBITDA margin for the segment was 44.8% an increase of 1700 50 basis points from the third quarter.
2019, the increase in non-GAAP adjusted EBITDA margin was primarily due to the influx of high margin transactional sales along with the impact of ongoing cost control initiatives, partially offset by higher incentive compensation expense.
As I mentioned earlier in my remarks, the third quarter was a very strong IPO quarter and beefing continued to lead the transactions filing market, maintaining strong market share, especially in large and complex transaction.
For the quarter was also significant with respect to specs or special purpose acquisition companies, which made up a large share of the total number of ipos.
We were prepared for the shift as we started to direct more attention to specs and 2019, when we recognize an increasing number of large and high quality specs coming to market.
Our increased focus on the segment has paid off with decent filing accompanied best number of specs in the third quarter, representing a significant market share increase in the space with many of these filings leveraging our software disclosure product active disclosure.
Net sales in our investment companies software solutions segment were $17.0 million in the third quarter of 2020, an increase of 12.6% from the third quarter of 2019 due in part to increased activity from existing clients, adding new funds to the platform.
We also saw strong demand in our new our digital offering which provided a sales lift to the segment just one quarter after its release.
Non-GAAP adjusted EBITDA margin for the segment was 25.9% an increase of nearly 1700 basis points from the third quarter of 2019.
The large increase in non-GAAP adjusted EBITDA margin was primarily due to the operating leverage on the increase in sales as well as the impact of operating efficiencies, including cost savings related to our arc regulatory solution in Europe were removed from an outsourced to an in house solution.
Net sales in our investment companies compliance and communications management segment were $62.3 million in the third quarter of 2020, a decrease of 7.2% from the third quarter of 2019, primarily due to lower commercial printing sales related to contracts. We are exiting in connection with the right size.
King of our manufacturing platform as well as lower mutual fund compliance and transactional print volume.
Non-GAAP adjusted EBITDA margin for the segment was 3.2% a decrease of 200 basis points from the third quarter of 2019.
The decrease in non-GAAP adjusted EBITDA margin was primarily due to lower overall print volume and higher incentive compensation expense related to the strength of the consolidated financial performance of the company, partially offset by the impact of ongoing cost control initiatives.
In addition, our proactive exit from certain low margin print contracts, while still in the process of Rightsizing. Our print platform causes a near term negative operating leverage impact as the plant fixed cost reductions are not scheduled to be completed until early 2021.
Our third quarter 2020, non-GAAP unallocated corporate expenses were $10.5 million, an increase of $8.0 million from the third quarter of last year.
The increase in unallocated corporate costs was primarily due to increased incentive compensation and higher benefits related costs, partially offset by the impact of ongoing cost control initiatives.
Free cash flow in the quarter was $67.6 million, an improvement of $15.4 million from the third quarter of last year, primarily due to higher adjusted EBITDA and lower cash interest we.
We continue to focus on working capital management and our efforts resulted in an improvement the DSO of approximately one day from last years third quarter.
We ended the quarter with $291.9 million of total debt and $251.0 million of non-GAAP net debt, including $61.5 million drawn on our revolver and from a liquidity perspective, we had full access to our $300 million revolver as.
Well as $40.9 million of cash on hand.
As of September Thirtyth 2020, our non-GAAP net leverage ratio was 1.5 times down a full turn from the third quarter last year.
We repurchased approximately 444000 shares of common stock during the quarter for $5.1 million at an average price of $11.54 per share.
Year to date, we have repurchased just over 1 million shares of common stock for $8.9 million at an average price of $8.43 per share and have approximately $16.1 million remaining on our $25 million stock repurchase authorization.
As it relates to the fourth quarter transactional activity in capital markets remained robust throughout October.
However, given recent market volatility geopolitical uncertainty and the ongoing pandemic in the unknown impact of all of these items on the global economic landscape visibility in this area of the business remains limited.
In addition, as I noted earlier, we continue to exit low margin print contracts in preparation for the upcoming regulatory changes that will impact print demand beginning in 2021. Given these factors we are taking a conservative approach to our fourth quarter outlook expecting sales to be in the range.
Of 170 million to $180 million down approximately 5% to 10% from the fourth quarter of 2019, roughly half due to a decrease in print revenue related to low margin customer printing contracts that we proactively exited with the remaining portion relate.
Due to the anticipated impact of the macroeconomic landscape on our capital markets transactional in venue offerings for.
Precise context transactional activity in venue generated approximately $83 million or 43% of our total sales in the fourth quarter of 2019.
Regarding profitability, we expect our fourth quarter non-GAAP adjusted EBITDA margin to be in the range of 13% to 15% slightly higher than last year's fourth quarter at the midpoint.
Ill now pass it back to Dan.
Dan.
Thanks, Dave I'd like to highlight a few items and then we'll open it up for Q in a week.
Regarding the upcoming regulatory change that will reduce demand for print in 2021, we are well prepared we continue to expect the reduction in print related net sales of approximately 130 million to $140 million in 2021, and a reduction in non-GAAP adjusted.
EBITDA of approximately 5 million to $10 million related to the regulatory change we are on plan and in some cases ahead of plan as it relates to delivering the cost savings associated with Rightsizing, our platform and I remain confident in our ability to meet or exceed the plan.
In addition, I'm excited about the pace of development and demand for our software solution.
As we mentioned in our earnings release, we signed the largest ever software solutions customer contract in the company's history.
This multiyear multimillion dollar contract further deepened a key investment companies client relationship and represents an expansion of their end investor financial reporting capabilities on a global basis, leveraging our arc reporting solution.
We also saw significant demand from our investment companies clients for our recently released our digital solutions as clients look to defund to help transition their document composition and distribution workflows to a post 33 environment, where distribution of print the documents will be significantly diminish.
The venue team recently announced a first of its kind data privacy assessment tool for our virtual data room offerings.
Revenue continues to transform how companies meet their data privacy obligations by scanning data room content defined personally identifiable information.
After automatically identifying and visualizing potential exposure venue now empowers professionals to instantly REDAPT sensitive data.
Clients are thrilled about the ways as tool makes their job significantly easier and allows them to get ahead of near constant regulatory changes.
Elsewhere, the FDIC announced recently that it has selected 14 technology companies to compete in the next phase of the agency's rapid prototyping competition.
Next spring design could develop an innovative new approach to financial reporting, particularly for community banks. Among other market leaders defund was awarded an initial contract to develop a prototype addressing the business problem.
In the next stage, we will demonstrate a prototype for this high profile partnerships that will transform the FDIC is financial reporting this.
This is an exciting opportunity for us to demonstrate our extensive domain and technological expertise again some of the other premier financial technology providers, leveraging both our leading AI tool you, Brad the app and our venue virtual data room.
In closing we are excited about our third quarter financial results along with the various sales and operational wins that produce them. We have worked over the last four years to build a great company and are well on our way to achieving the objectives, we committed to as part of our 44 24 strategy.
Lastly, I want to thank the deepen employees around the world. We have been working tirelessly to maintain our operations ensure our clients continue to receive the highest quality service without disruption stay safe and healthy.
Operator, we're ready for questions.
Q I see reminder, to ask a question immune suppressed Paul one on you can assume.
So we continue to press the pound all hash key.
Please stand by while we compile the coupon.
The first question comes from peak Snake Mom and baby.
In line.
Good morning, Thanks for taking the question.
Hi, Good morning, Hey morning, I appreciate the comments on the outlook certainly it looked like October's IPO activity was really strong talk.
Talk about any.
Particular comparisons that you might have with the last year in terms of.
Large projects.
In either our capital market or the investment side.
Yes, Pete nothing specific as it relates to large transactions that we might have had last year I think when we look at the outlook for the fourth quarter.
Is used as you commented October IPO market was very strong I think when you look at just some of the uncertainty across the economic landscape.
Whether it be related to the election, the uncertainty around the results at this point et cetera, we typically see a slowdown around the election period and so we're just taking a cautious.
Approach to Q4, and then on top of it in addition to the.
The expectation of us a little softer transactional market.
More of the low margin print work that we're exiting you saw that happen in Q3 more comes out in Q4, and so thats what.
Really behind the guidance with the expectation that from a software perspective, we'll continue to see growth.
Right right, Okay that makes sense and then just in terms of I.
Kevin I may have missed it if you mentioned it but some of the work on enhanced disclosures.
In the investment World.
That that the FCC is looking at how do you see deep and playing a part in that and.
Are you proactively trying to shape the discussion of how these enhanced disclosures can be enhanced investor exposures could be designs.
Yes, so great question. So when we think about 33 and 490 day, which are.
In in process now going effective.
In 2021, and what what sits behind that a large reduction in print and.
The software opportunity that's in front of us.
In two of our products within the suite.
It does allow us to solve clients' digital content management and distribution needs.
And those sales efforts are proceeding well, we would view the.
The new proposal on it.
Investor experience been enhanced disclosure similarly that it offers opportunity for us to.
Further deepen relationships to be up our software products.
Got it got it okay. Okay. Thank you appreciate it.
Thank you.
Your next question comes from Challenge Council CGS Securities. Your line is open.
Good morning, Charlie.
Morning, Charlie on just a couple of things first if you could drill into the margin expansion year over year in the quarter a little deeper maybe look at this is in terms of how much of that was really transactional related versus software or other just kind of give us a better sense of how.
How much of that margin.
<unk> expense related that was.
It says it's coming out of the equation versus just pure pickup in mix that kind of thing.
Yes so.
Charlie I'll start and then if Dan wants to jump in I think when you look at the biggest year over year Delta from an earnings perspective was the cost takeout and.
I should should reiterate that the vast majority of that cost takeout is permanent.
We're obviously benefiting a little bit from a travel and entertainment perspective.
Given given the virus, but some.
The cost take out numbers are significant and mostly permanent.
Obviously does get offset a little bit by some of the incentive Tom.
We also have a four one k.
Plan Thats also performance based and just given the tremendous performance that.
That expense is up for the year and then as it relates to transactional.
You know most of that obviously came through the equity side in the form of Ipos I think revenue there was up probably $11 million and.
That revenue typically comes through at a very high incremental margin.
And so you know that.
Thats, probably in the $8 million to $9 million range of both increased profitability.
Which then gives you some sense that back to my earlier comment that the cost savings in the quarter.
It is larger than that.
So you can leverage that nicely and then obviously the fences you've done a good job taking the cost out.
No, it's a pandemic, but prior to that but how much more on your costs are kind of yet to come or do you think you've identified or taken out what you need to kind of to put into place.
Yes, so yes, so just just add on to a bit of daves Dave's comment as well and it addresses. This question. The if you look on the software side and the efficiencies that we've gained we would expect to see strong incremental margins from software sales growth.
But you look at the margin and we're driving it as Dave mentioned in his comments from operating efficiencies within the software.
We've replaced some big partner relationship with our own software capabilities and that's led to.
Very good flow through on on sales.
Profit growth are on sales.
Guard to the year you lost last question.
We you know the biggest thing we have in front of us from a demand perspective on the negative side is the 33 and the print side, which we've been aggressively.
Managing toward feel very good about our plan there.
We do have some actions that will be coincident with.
With the regulation going into two effect on that we've been managing towards throughout this year and then.
We'll continue to stay very disciplined on the cost side as we always do and and as we see growth and in software, it's great to see the flow through coming through at a much higher level given the efficiency efforts that we we put in place and it's really just getting much higher velocity off of our investment in EBITDA.
All the dollars.
That's great and then just one last one from me if I could on self.
Software solutions, you said you signed a large deal in history.
Just kind of looking at new sales has the pandemic. It helped you guys at all in terms of driving people from in house to outsourcing are you seeing kind of a pickup more.
In down sales calls related to that.
Yes. So so it's interesting so the contract rate your reference that will have bigger has a little bit of an impact in this year, but but really.
Full year impact starting in 2021, and it's our given the business units in that three to five year type of contract.
We did see at the height of the pandemic.
Some negative impact on software sales growth at par.
Part of that relative to venue was the M&A environment that we've seen now improve in September from an announced deal perspective.
Then even on our recurring compliance product.
We did see at the height of the pandemic.
Slower willingness of clients to some moves or go deeper on some of the product lines Thats largely past us now and so to your point now you start to see where the discussions take place on.
Ways of.
To use your term outsourcing or increasing the amount that we can help.
Our clients digitize their business and move forward with our software solutions.
Great. Thanks looking at the Commission.
Yes. Thank you.
Your next question comes from Rohit Sharma of B. Riley Your line is open.
Hi, good morning.
I wanted to understand a little bit about the.
So on the transactional side are you seeing any difference or change in the pricing per transaction or revenue yes.
Oncor transaction has that changed.
At all on that.
Just wanted to drill a little bit into.
The fourth quarter.
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That was projecting or you are guiding the TTI washing revenue.
Are you assuming a flat or are you seeing it down.
This quarter.
And then I've a follow up question about the Clinton.
Yes, good place for us so.
Sure so when.
Regarding your question on.
Transactions I think when you when you look at the fourth quarter.
And whats baked into the outlook here, yes, we are expecting transactions to be down.
From the third quarter.
Of this year and again I think.
When you look at the total decline like I said it's.
But part of it is driven by.
The low margin print work that we're exiting as well as this decline in transactional again with growth a little bit of growth on the software side.
Got it, yes, and Rockies to add onto Daves point.
On the.
A question on pricing, we're really not seeing a change in on.
On a unit pricing basis, I think it's much much more there is a mix impact so depending upon.
What what's in the hopper or the Q, but on a on a unit pricing basis, not not seeing an impact.
And we've adjusted we were the first went out with the virtual IPO process, we talked about that a bit on our last call.
And that's just.
Up and it's been a great example of how we've adapted.
In the environment.
We're seeing some.
Some demand.
To get back in.
In person, but still the vast majority of.
Interest is to continue doing things virtually.
All right and then on the decline in print is that a similar in Q4 that that you had a decline in Q3.
Actually probably accelerates a little bit more in Q4 relative to to what we saw in Q3.
And how does that split between.
Compliance side of the business and on the transaction side.
I would assume most do the compliance that.
No. So so most of it will show up.
In the.
Global investment companies business, where we have commercial printing growing up there.
Right.
Got.
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Okay I'll take my question offline. Thanks.
Thank you.
Your next question comes from CICC premiums of Wells Fargo. Your line is open.
Good morning, everyone.
Good morning, Jay.
Morning, I just wanted to focus on that that large contract suffer contract with an investment company, particularly on the revenue drivers, Iran. Any annual price escalators on next sort of five years or is that kind of a flat subscription.
Yeah, we we wouldn't get into particulars on the contract, but we're very comfortable with the with the pricing on it and I think more importantly, what it does for our clients.
Adds tremendous value.
As as the system to do from an efficiency.
Okay.
And cost perspective, and so.
We're comfortable with the with the price that we've been able to to achieve.
Okay is there any volume component to it.
That revenue model, there or is it more kind of pure subscription model.
No there are volume components so.
We've talked in the past about in this part of the business there is a.
Price per funded than the number of funds that are loaded.
And there's implementation as well.
Got it.
It sounds like there was probably no revenue contribution from that contract in Threeq here, maybe a little bit for us, but most of the impact or showing 2021.
Correct.
Great. Thank you very much hey, Jake let me just clarify there so that contract was with an existing customer. So it's not a net new some of the growth.
Aspects of it will be net new for us in terms of the the mix and the impact on revenue but.
But that we're doing work for that client today.
Okay very helpful. Thank you.
There are no further questions at this time I turn the call back over to the presenters.
Okay. Thank you.
And we'll look forward to speaking with you.
In February following the fourth quarter.
And in the interim thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now.
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