Q4 2020 Donnelley Financial Solutions Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Donnelley financial solutions fourth quarter earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session too.
To ask a question during the session you will need to press star one on your telephone.
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I would now like to hand, the conference over to your Speaker today, Justin Ritchie head of Investor Relations. Thank you. Please go ahead.
Thank you good morning, everyone and thank you for joining the Donnelley financial solutions fourth quarter 2020 results conference call.
This morning, we issued our fourth quarter earnings release, a copy of which can be found in the investors section of our website at Investor Day deepened solutions dotcom.
During this call will sort of forward looking statements that are subject to uncertainty for complete discussion. Please refer to the cautionary statements included in our earnings release and further detailed on our annual report on form 10-K, 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 operations.
Finished the year by delivering strong fourth quarter results highlighted by record quarterly software solutions net sales of $54 $2 million or nearly 26% of our total net sales in the quarter overall, our consolidated net sales grew by over 10% as compared to last year's fourth quarter.
Excluding print and distribution on our remaining net sales grew approximately 20% as the strong rebound that began in the third quarter in our transactional offerings as well as in our software solutions sales continued.
We also posted record quarterly operating cash flow and free cash flow of $101 $7 million and $95 $1 million respectively.
Fourth quarter non-GAAP adjusted EBITDA margin was 16, 6%.
On improvement of approximately 290 basis points from last year's fourth quarter, continuing a trend of year over year improvement debt now stands at six straight quarters the.
The improvement was primarily driven by a better business mix, along with the significant impact of permanent cost reductions Dave.
Full year 2020, non-GAAP, adjusted EBITDA totaled $173 $4 million up $36 $4 million or nearly 27% compared to the previous year, our non-GAAP adjusted EBITDA margin expanded to 19, 4% in 2020.
Our year over year improvement of approximately 370 basis points.
This improvement is well ahead of our long term target again, driven by the continued improvement of our business mix and our diligent cost control.
The company has increased profitability, along with reduced capital expenditures and cash interest helped to drive record of annual free cash flow of $123 $1 million strategic capital allocation enabled us to repurchase both debt and equity at attractive prices during 2020, while simultaneously.
<unk>, reducing net debt by $121 $9 million during the year, resulting in year end net leverage of <unk> nine times 2020 was of great year for defense.
While the financial performance in 2020, we're strong on the equally proud of part of the team accelerated the pace of our business transformation throughout the year, especially considering that we are operating through an unprecedented business environment due to the ongoing COVID-19 pandemic for example in our investment companies business.
We signed the largest software solutions customer contract in the company's history as a key customer significantly expanded their global deployment of our arc reporting solutions.
We also launched the arc regulatory global regulatory platform, which offers a full suite of cloud based reporting solutions to meet the complex regulatory demands.
Finally, we launched our digital our digital content distribution solution, providing clients with the software based solution to manage the complexities of content management and digital distribution in a post SEC rule of 33 and $4 98 a environment.
Switching to our capital markets transactional business, we reacted quickly to the changing environment in early 2020, transforming our production platform and service delivery model to adapt to our clients' need for a fully virtual experience and by doing so supported the first all virtual IPO on the New York stock exchange.
Yeah.
The capital markets team also rapidly adapted to the sharp acceleration of stack filings during 2020 by creating a custom offering leveraging active disclosure and significantly increasing our spec market share.
These are only a few of the many business wins, we produced during the year and the result of all of our efforts is that deepen is extremely well positioned heading into 2021.
Staying with active disclosure for a moment, we are very excited about the recent launch of our new active disclosure platform.
The <unk> a key component in delivering our 44 in 2004 strategy born in the cloud and re imagined from the ground up this new platform transforms financial and regulatory reporting with seamless integration simple and fast onboarding and an array of intelligent core tagging on file.
<unk> tools easy to get started intuitive to use and backed by the unparalleled support of deferred experts UAV includes the collaboration tools and fast financial data linking our clients need without extra add arms and hidden cost and represents a significant step forward for the market.
Place and SEC compliance, we believes that new way D is the perfect product fit for a market that is looking for solutions focused solely on FCC compliance and.
And we are building off the strong positive feedback from our early adopter clients. There is much more to come regarding new a b throughout 2021.
Before I return to provide an update on our 44 in 2004 strategy, including our longer term objectives I would like to turn the call over to Dave to provide more detail on our fourth quarter financial results and our outlook for the first quarter Dave.
Thank you Dan and good morning, everyone.
Before I discuss our fourth quarter financial performance I'd like to recap a few housekeeping items.
First as discussed throughout the year, we are using the regulatory changes that are reducing mutual fund and variable annuity print demand as a catalyst to accelerate our mix shift toward our software and tech enabled solutions offerings.
It's more proactive approach has changed our longer term growth outlook for the traditional investment companies offerings, given the change in expectations as part of our annual goodwill impairment analysis, we recognized a noncash goodwill impairment charge of $46 million during the fourth.
<unk> per fully impaired goodwill in the investment companies compliance of Communications management segment.
Next regarding our segment results in 2021, we are near complete on implementing our plan to consolidate our manufacturing footprint and preparation for the regulatory changes that will impact demand for print and distribution starting this year.
These actions will permanently and significantly reduce the fixed cost in the company and.
In managing the business effectively that know costs are fixed in the mid to long term.
And we consistently look for opportunities to reduce all costs.
There are certain expenses for centralized overhead bins that are allocated to the four operating segments based on various drivers, including net sales and head count on a proportionate basis.
While we expect overall EBITDA margin to increase from 2021 of portion of these allocated expenses will shift out of our investment companies compliance and communications management segment in 2021.
Into the other three segments due in large parts of the significant expected drop in printing distribution net sales and head count in this segment.
We will update you each quarter so the impact on the segment results, but I wanted to mention it here in advance.
In addition, we reported $15 6 million in restructuring charges in 2020.
Most of this restructuring was related to the consolidation of our print platform that I, just noted and enables us to minimize the impact of the expected step down in print revenue related to the regulatory changes that are effective in 2021.
Lastly, regarding the multi employer pension plan liability related to the second quarter bankruptcy of LSC communications.
We expect to work through the arbitration process with RR donnelley to finalize the allocation of this liability between the companies.
As of the end of the year, we had $15 $2 million of crude related to the contingent liability as well as our estimated share of required payments until the final allocation is determined these.
These expenses associated with this liability.
Recorded within SG&A and the corporate segment and are excluded from our non-GAAP results.
Turning now to our consolidated financial results net sales for the fourth quarter of 2020 were $210 3 million, an increase of $20 million or 10, 5% from the fourth quarter of 2019.
Software solutions net sales of the fourth quarter increased by $4 million or 8% compared to the per quarter of 2019, primarily due to the continued adoption of our software solutions across the portfolio.
Tech enabled services sales increased by $23 2 million or 27, 6%, primarily due to the increased capital markets transactional and compliance activity.
Print and distribution revenue decreased by $7 2 million or 12, 9%, primarily due to the lower demand for printed materials within investment companies for both compliance and commercial printing.
Fourth quarter non-GAAP gross margin was 47, 8% from approximately 980 basis points higher than the fourth quarter of 2019, primarily driven by a favorable business mix.
Train increased higher margin Tech enabled services and software solutions sales combined with overall lower print volume and the impact of ongoing cost control initiatives, partially offset by an increase in incentive compensation expense associated with the strength of the company's full year.
<unk> performance.
Non-GAAP SG&A expense in the fourth quarter $65 $5 million, an increase of $19 $5 million compared to the fourth quarter of 2019.
As a percentage of net sales non-GAAP SG&A was 31, 1% an increase of approximately 690 basis points from the fourth quarter of 2019 the.
The increase in non-GAAP SG&A was primarily due to higher incentive compensation expense I kind of.
Associated with the strength of our full year financial performance. In addition, higher benefit related costs. The increase of net sales and changes in the business mix also resulted in higher SG&A, which was partially offset by our ongoing cost control initiatives.
Our fourth per non-GAAP, adjusted EBITDA was $34 9 million, an increase of $8 $8 million for 33, 7% from the fourth quarter of 2019.
Fourth quarter non-GAAP adjusted EBITDA margin was 16, 6% an increase of approximately 290 basis points from the fourth 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.
The offset by increases in incentive compensation and employee benefits expense.
Turning now to our segment results net sales on our capital markets software solutions segment were $36 $1 million in the fourth quarter of 2020, an increase of 11, 1% from the fourth quarter of 2019, primarily due to increased venue data room activity new wins on upselling of existing IBRA.
The clients continued client growth in active disclosure as well as price increases.
We were particularly pleased to see venue sales increased 10, 4% from the fourth quarter of 2019 as the improving M&A environment. We saw late in the third quarter continued into the fourth quarter.
Non-GAAP adjusted EBITDA margin for the segment was 28% an increase of 20 basis points from the fourth quarter of 2019.
The increase in non-GAAP adjusted EBITDA margin was primarily due to operating leverage benefits on the increase in net sales as low as the impact of operating efficiencies, partially offset by higher incentive compensation expense.
Net sales on our capital markets compliance and Communications management segment were $108 million in the fourth quarter of 2020, an increase of 37, 9% from the fourth quarter of 2019, primarily due to increased capital markets transactional and traditional compliance activity.
We continue to see year over year growth in transnational sales in the fourth quarter, primarily driven by the continued strength in IPO activity with IPO market pricings up significantly from the fourth quarter of 2019.
Similar to the third quarter spot.
<unk> continued to drive an outsized portion of the IPO market.
Fourth quarter of M&A filings also increased year over year with larger filings of sweet spot for defense being particularly strong as the pickup in deal announcements. We noted on our third quarter earnings call started to translate into increased filings in the fourth quarter.
After a strong start to the year debt related transactional activity was softer in the first quarter as both domestic and EMEA debt offerings slowed.
Compliance sales were up in the quarter, primarily due to increased market share of SEC compliance filings.
<unk> year over year growth in proxy sales as well as increased 8-K activity related to the new Fast Act mandates.
A quick note on our market share.
'twenty marks the second consecutive year that we've increased our share of SEC compliance filings. After several years of share declines yet another major milestone for <unk> in 2020.
Transactional filing was also strong during the year up over 2019 nearly across the board.
Non-GAAP adjusted EBITDA margin for the segment was 35, 4% in the fourth quarter of 2020, an increase of 790 basis points from the fourth quarter of 2019.
The increase was primarily due to the influx of high Mark of the transactional sales along with the impact of ongoing cost control initiatives, partially offset by higher incentive compensation expense.
Net sales in our investment company software solutions segment were $18 $1 million in the fourth quarter of 2020, an increase of two 3% from the fourth quarter of 2019 with growth driven by the continued demand for our new our digital offerings.
From this segment was lower than what we have seen recently due in part two of large onetime arc pro services engagement in last year's fourth quarter.
Non-GAAP adjusted EBITDA margin for the segment was 16, 6% from the fourth quarter of 2020 a day.
Increase of approximately 490 basis points from the fourth quarter of 2019.
The decrease was primarily due to higher incentive compensation expense, partially offset by the impact of our ongoing cost control initiatives.
Net sales on our investment companies compliance <unk> Communications management segment were $48 $1 million in the fourth quarter of 2020, a decrease of 22, 2% from the fourth quarter of 2019, primarily due to lower commercial printing sales from contracts, we exited relating to the right side.
<unk> of our manufacturing platform. In addition to lower mutual funds compliance print volume.
Non-GAAP adjusted EBITDA margin for the segment was negative six 7% of decrease of approximately 570 basis points from the fourth quarter of 2019.
The decrease of non-GAAP adjusted EBITDA margin was primarily due to the 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.
As I mentioned earlier, we are Inc.
<unk>, our plan to consolidate our manufacturing footprint, which will permanently and significantly reduce the fixed cost in this segment going forward given this segment.
The segment to return to profitability.
Our fourth quarter 2020, non-GAAP unallocated corporate expenses were $10 6 million, an increase of $5 $3 million from the fourth quarter of 2019. The increase was primarily due to increased incentive compensation and higher benefits related costs, partially offset by the impact of ongoing cost control.
It's free.
Free cash flow in the quarter was $95 $1 million of quarterly record and full year cash flow was $123 1 million, an increase of $113 $4 million over full year 2019.
The full year increase was primarily due the higher adjusted EBITDA lower interest expense and reduced capital expenditures. In addition, an overall reduction in working capital benefited full year 2020 free cash flow.
We ended the year with $235 million of total debt and $73 $6 million of cash on hand, resulting in $156 9 million of non-GAAP net debt.
In addition, we had nothing drawn on and full access to our $300 million revolver.
As of December 31, 2020, our non-GAAP net leverage ratio was <unk> 95 down one one times compared to December 31 2019.
We repurchased approximately 90000 shares of our common stock during the quarter for $1 $3 million.
For the full year 2020, we repurchased just over $1 1 million shares of common stock for $10 3 million, an average price of $8 92 per share.
As noted in our earnings release and as part of their ongoing evaluation of <unk> various capital allocation options. Our board of directors recently approved a $50 million common stock repurchase program that expires December 31, 2022, replacing our existing $25 million plan.
<unk>, which was set to expire on December 31 2021.
This repurchase program demonstrates management's as well as the board's confidence in our strategy and the expected financial performance.
We plan to be opportunistic with repurchasing shares in 2021 as part of our broader capital allocation strategy that will also feature of additional debt reduction and our refinancing of our high coupon notes, which are callable later this year at the same time, we will maintain our disciplined approach.
On capital spending and M&A.
Next I wanted to provide some color around guidance as well as our outlook for the first quarter.
As Dan mentioned earlier, we are very pleased with our tremendous 2020 results. However, as I have noted several times over the last few years, the transactional pieces of our business are challenging to forecast regardless of the economic environment.
We are not providing comprehensive guidance for full year of 2021, we.
We will provide some components to facilitate your modeling on.
Summarize these items now.
As Dan will detail later in his remarks, we expect total software solutions net sales to grow by at least 10% in 2021 coming off of strong second half in 2020 with additional momentum expected from the recent launch of new AED.
Regarding the upcoming regulatory change that will reduce demand for print in 2021, we continue to expect a reduction in print related net sales of approximately $130 million to $140 million in 2021.
And specific to this net sales reduction we continue to expect a reduction of non-GAAP adjusted EBITDA of approximately $5 million to $10 million.
Depreciation and amortization is expected to be in the range of $40 million to $45 million down from $59 million in 2020 as the acquisition related intangibles from a 2010 acquisition are fully amortized as of December 31 2020.
Interest expense is expected to be approximately $22 million.
Our full year non-GAAP effective tax rate is expected to be in the range of 29% to 31%.
We expect capital expenditures to be approximately $45 million.
From $31 $1 million in 2020, as we plan to increase the internal investment in our software solutions offering in the near term.
Further accelerate our 44 and the four strategy.
Dan will provide more context on this increased investment in his remarks shortly.
Regarding our outlook for the first quarter, we are expecting net sales to be in the range of $200 million to $220 million down approximately three 6% year over year at the midpoint due to the significant reduction in printing distribution for the regulatory changes related to the SEC rules.
<unk>, three and $4 98 day, nearly offset by continued strength in our transactional and software offerings.
Given this positive mix shift in net sales with less print and more software as well as increased transactional activity. We expect our non-GAAP adjusted EBITDA from both the dollar and margin perspective to improve substantially when compared to the first quarter of 2020.
Included in this expectation and supported by what we've seen through the first two months of the year. We anticipate that we will continue to benefit from a favorable sales mix. While also realizing the benefit from the cost control initiatives, we put in place during 2020.
I will now pass it back to Dan who will provide an update on our $44 24 strategy, including our long term objectives Dan.
Thank you Dave before we open it up for Q&A I would like to discuss further our 44% and 24 strategies.
In may of last year I introduced our goal of doubling the proportion of our sales mix derived from software over the next five years.
Moving from 22% of sales from software solutions in 2019% to 44% in 2020 for.
The growth in our software offerings strong tech enabled service offerings and a shrinking print and distribution offering resulted in continued strong adjusted EBITDA adjusted EBITDA margin and cash flow performance.
As I detailed in my opening remarks, we have made excellent progress in terms of enhancing product development velocity, introducing three new software products to market over the last 15 months, while also expanding various key customer relationships across our product portfolio building.
Building off of already strong software solutions sales growth in the second half of 2020, these product introductions and expanded relationships as well as the potential for a rebound in M&A in 2021 key driver of venue growth.
<unk> us well to.
The increase our software solutions sales growth back to double digits in 2021.
On the print and distribution side, we remain on track to execute our print platform optimization efforts in concert with the rollout of the SEC rules 33, and $4 98 a.
Which when combined with our proactive exit from non strategic low margin commercial print contracts significantly reduces our expected print and distribution sales starting this year.
The combined impacts of these efforts have us on track with if not ahead of where we thought we would be heading into year two of our 44 in 2004 journey. In fact, we are currently estimating that software solutions net sales will make up over 30% of total net sales in 2021.
With print and distribution falling to a little over 20%.
Which will mark the first time in the company's history that software sales will exceed print sales of major milestone in our transformation.
Given the significant progress we made against our 44% and 24 operating objectives.
2020 as.
As well as our outstanding financial performance, we are updating our longer term financial objectives of heading into 2021, and we will include these updated targets in our investor presentation.
Let's start with our longer term organic revenue growth target as business mix continues to improve and with the reduced headwind from print and distribution sales. We continue to expect that we will return to sustained consolidated organic revenue growth in 2022, following the regulatory driven reduction in print and distribution.
Sales.
Regarding software solutions sales, specifically, we expect software solutions annual net sales growth to return to 10% starting in 2021.
With this acceleration in software solutions sales growth, we continue to expect software solutions to make up at least 44% of total sales by 2024 with print and distribution sales expected to drop down to the mid teens.
In terms of profitability, we made significant progress in this area in 2020, improving non-GAAP adjusted EBITDA margin by approximately 370 basis points year over year, which is well ahead of our initial goal of 75 basis points per year.
And putting us close to our original longer term target of 20% by 2024 due.
Due to our over achievement in 2020, we are updating our longer term margin goal and.
And now expect to operate at or above 20% non-GAAP adjusted EBITDA margin starting in 2021 with the intent of continuing to improve margin from this level over time, while also investing for growth.
As I mentioned earlier, our improved profitability stronger business mix lower cash interest and disciplined capital spending produced record annual free cash flow in 2020, again, well ahead of our expectations heading into the year.
Going forward, we will continue to focus on driving free cash flow targeting to convert our EBITDA to adjusted free cash flow at an average of at least 40% annually, which for context is our average annual conversion rate since the spin.
On last comment on longer term targets as Dave mentioned earlier, we are very excited about the wealth of internal investment opportunities. We have currently and given the accelerated progress. We saw on 2020 in terms of profit and cash flow growth. We are planning to increase our investment in annual capital spending to approximately 5%.
The 6% of net sales over the next few years to ensure we can continue to drive the topline growth. We are targeting as a reminder, the vast majority of our capital spending relates to the capitalization of software development costs like all of our capital allocation decisions you can expect us to remain disciplined in our approach to <unk>.
Internal investment allocating funding only to projects that we expect will produce superior returns to investors over the long term Inc.
Closing, we entered 2021 with strong end markets and are keenly focused on continuing to drive our 44% and 24 strategy and the resulting financial profile of our various operational successes in 2020 prove that we are delivering the right solutions and the moments that matter and create.
Exceptional value for our clients, while the stellar financial performance in 2020 shows out of those successes can translate into superior returns for our shareholders of <unk>.
More confident than ever in our future now with that operator, we're ready for questions.
As a reminder to ask a question you will need to press star one on your telephone to it.
John on your question press, the pound or hash key please standby, while we compile the Q&A roster.
Our first question comes from the line of Peter Heckmann. Please go ahead. Your line is open.
Good morning, gentlemen, thanks for all of the information on the quarter and the outlook of Dan could you revisit the comment you just made I want to make sure that I heard it correctly.
Clearly the company is based on sustainable reductions in the cost base.
Our assumption was that you'd really over.
Outperformed in 2020, and we're expecting EBITDA margins to fall in 2021 and you.
You made a comment as regards 2021.
The minutes ago, and I missed it sounded to me like Youre expecting debt.
Kind of the base case, 2021, EBITDA margins could be up year over year.
Yes, Thanks Pete.
Yes, that's correct when we look at the.
Reduction of revenue coming in print and distribution of the $135 million at the midpoint in the $5 million to $10 million of EBITDA cut.
Coupled with where we're seeing growth, namely software solutions.
And then the entering 2021 with a pretty robust transactions market.
We feel we have the opportunity to expand margins in 2021.
That's great.
Impressive alright, and then great job on on getting net net leverage down significantly over the last three or four years.
How does that change your thoughts about capital allocation.
The the kind of the.
Target leverage that you think about running the business at.
Sure. Thanks, Yeah, So I'll take a first crack and then David if you want to jump in but it's an important question and one that we discuss internally and with our board frequently.
Certainly we're pleased that our performance has put us in the position to have the amount of financial flexibility that we do.
And we do have a lot of our revenue that's recurring but we also understand the cyclicality of some of the markets. We play in as Dave has mentioned previously the transactions turn off and on very quickly.
So even taking that into consideration.
<unk> created a great balance sheet.
The cash does not burn a hole in our pocket.
So when we think of capital allocation you saw we increased our buyback.
It starts with looking at our business and the assets that we own we model out several years forward look at intrinsic value. The typical financial metrics nothing unique there I think what is unique within our businesses the transformation that is.
Underweighted in well in progress and so we have over $200 million of software revenue growing in the 10 plus percent range and that has a lot of value when we look at comparable market multiples the law.
A larger part of the revenue in software revenues roughly two thirds is recurring compliant SaaS revenue, primarily arc, Sweden active disclosure.
Then you any bribery of makeup the.
Most of the rest and they have really attractive financial profiles and value as well.
So we look at it Capex is the other place you saw on 2021 that we're increasing capex.
New capital.
Capital and Thats, we're increasing that it's primarily software development and where we're making the increase is in software development.
And it is variable and so we're thrilled with our internal development efforts in terms of great product design development velocity velocity, rather and so we've open the spigot there a bit.
We think the markets for existing products ability to add functionality capabilities to serve our clients.
Hi.
In additional markets our offerings is really strong.
So.
I would say that even though we are planning to ramp up capex, we're only going to spend where we have good projects Inc. 2020 was a great example, we had more dollars allotted we were unconstrained by our balance sheet and cash flow.
Yet remained very disciplined on projects in dollars that debt. We approved then ultimately spent and so we built the culture here of not confusing activity with progress.
And then moving on the M&A M&A.
M&A does remain very expensive.
Despite our enhanced financial flexibility.
We look at M&A based on intrinsic value of of the asset on what it means to US. We also recognize the current prices many of our priced for perfection or beyond so while we have looked at a ton of opportunities over the past.
The four years or four plus years, if you will.
Look at M&A, we've been a net seller.
Debt Paydown will continue.
And so if I were to summarize it maybe gave you a little more gas floor, but if I were to summarize it I would say more of the same continue to drive performance generate cash and be very disciplined and thoughtful on how we deploy your capital to grow the business profitably.
Got it got it and just just sort of housekeeping the basis. Those term notes 200 of some $230 million of notes at eight in the quarter those can be called in October at one.
Oh two.
That's correct.
Okay, Alright wonderful day.
Again, it is star one on your telephone keypad, if you'd like to ask a question. Your next question comes from Charles <unk> from CJS Securities. Your line is now open.
Hi, good morning.
Good morning, gentlemen.
Good morning, Charlie.
If you could maybe expand a little bit more on the guidance if you could.
You talked about EBITDA improved substantially year over year, maybe quantify that and also maybe give us some sense on the the <unk>.
The segments, how we should think about that for Q1, and how that should shape up for the year as well from both the topline and profitability perspective.
Yes, sure Charlie So as I noted, we're expecting an uplift of margin and it's really driven by the the shift in the revenue mix as Dan commented earlier.
Really two specific aspects of that the first is less print and more software and tech enabled services and then the second is the higher proportion of the capital markets transactional revenue.
You look at the way we started the year our January results support this.
Net February results, yet, but the true.
Brent is continue I'd also say in addition to that we did a great job in 2020, reducing the cost structure. Most of that reduction was not reflected until the second quarter. In 2020. So so we will also see the benefits of those actions I.
I guess more specifics of the margin last year, we reported 13, 6%.
In the first quarter and.
I'd say if current trends continue through March I see EBITDA margin exceeding 20% so call it low to mid twenties for from a margin perspective, and again all contingent on the stronger mix continuing.
And as we said the toughest parts of predict is really the capital markets transactions.
The market, we have strong activity there, but the timing of of exactly when those will hit is.
Not certain.
Yeah.
Got it.
Maybe just a little bit more of the commentary by the segments.
In Q1.
As of the the.
The issue for each of the segments and also the.
On the margin outlook there too.
Yes so.
To my comments, obviously the transactional.
Revenue in capital markets would hit within capital markets compliance <unk> Communications management.
So.
That's the area, we would expect to see the most expansion.
So with the software growth, we would expect to see operating leverage there and the two software segments.
And then on.
On the on the investment companies compliance and communications management.
A couple of different things going on there one with the with the drop in print you have negative operating leverage and I commented on this in my prepared.
Remarks, but one of the things that will affect all of the segments is the way some of the shared cost get allocated we have.
Certain expenses more centralized functions in the.
Areas like finance procurement and HR just to name a few and those get allocated to the four operating segments.
Theres a variety of drivers that we use to allocate these costs of the different segments. Most of them are really based on a combination of net sales in head count and so what I would say is given the significant drop that we expect to see in investment companies compliance of communications management.
Net sales related to this regulatory impact.
We will be shifting.
Probably about $11 billion of cost out of that segment.
And then I'll go to the other three segments roughly three to $3 5 million will get pushed the each of the two software segments.
And then the remaining four to five will go to capital markets compliance of Communications management and those are.
Just to clarify those of our full year numbers.
And again, it's a zero sum game really just the question.
On how the segment share.
Certain of those centralized costs.
Got it and then just one more question on on the Q1 guidance the 220 there how.
Much of that reflects the kind of the.
Loss of print if you will.
Yeah. So.
Obviously with the regulatory impact.
Thats hitting the.
This year.
We haven't specifically broken out the detail.
<unk> two.
So the first quarter of 2020.
I would say, we're certainly expecting that the decline.
And then again.
Mostly offset or nearly offset by the transactional activity and the the growth in the software revenue.
And those sort of just the kind of the comps kind of year over year upstream of the back half of 'twenty.
2021 will be a tougher comp versus the June.
Last year obviously.
Yes, it's a great point I would go back to my comments about having a lack of visibility.
I think probably a good example of less than a year ago when.
When we were trying to understand the potential impact that the pandemic would have.
We certainly would have expected substantially weaker transactional environment during 2020.
And obviously, we're pleasantly surprised by by the strength of the markets there.
It's certainly hard to predict what the second half of 'twenty, one will look like but to your point.
We'll definitely be comping against a very strong second half.
Got it thank you very much.
Thanks, Charlie.
There are no further questions at this time I will now turn of.
We have a question from Raj Sharma from <unk> Securities. Your line is open.
Hello, Good morning.
Good morning, Rod results so congratulations.
I think congratulations also on the continued efforts to cut down costs.
And the <unk>.
The margins I just wanted to follow up on the guidance for the year.
There is on much of the revenue guidance, but you did say print is going to be down what 30 from from fiscal 'twenty levels.
Yes, and then the software services up 10%.
Right or double digits.
And then tech enabled the leaving out because.
That's all transactional base.
Yes.
It's I wouldn't say, it's all transactional base, but certainly the transactional piece again.
As we pointed to several times not only in the past, but also on this call.
It's the hardest to predict and that's really the biggest variable.
That debt from a from a predictability standpoint, we don't have great insight to what the balance of the year will look like on the.
Transaction, but.
So it is what it is it is what kind of actions turn out to be in the U S and globally.
Habits of the year not for the guidance for the first quarter are you, assuming the transaction sort of sequentially up or.
Or is there any AI.
Yes.
To my earlier comments.
What we saw on January supports that.
Haven't closed February yet, but the the activity level remains high on transactional.
And then we'll see where March comes out right. We have a lot of in the pipeline still but.
One of the one of the challenges on transactional is also the.
The timing on when these deals will hit and when will when modal ultimately recognize revenue and so I would say if that trend continues.
And that mix remains favorable like that debt.
Was my earlier comment around margins potentially reaching.
Kind of.
Low low 20%.
Got it.
Just add to that is.
Great to see venue.
Respond with the stronger M&A market.
We've lived through a fairly weak M&A market. Despite the fact that IPO has had been really hot and so you saw venue of strong growth, which started in Q3 continuing in Q4.
The 10, 4% in Q4.
And that'll be sensitive to the M&A market as well.
In Q1, we had last year, one or two larger projects, but.
The strong M&A market will certainly be helpful per venue.
Right and.
On that front.
Any sort of change in pricing relative to ipos of the stack.
And also about your market share so the market share of holding up in.
Deals of greater than $100 million.
And the time of the transaction side.
Yeah. So we continue to have strong market share I think when you look at the activity.
In 2020.
A lot of what drove the the.
The IPO pricings was the spec market.
And typically we historically had have had lower market share there, but it really increase that in 2020. So I think when you look at the the.
The overall, we increased our.
Share in stack IPO, we increased our share in non spec IPO.
But given the mix I think probably our overall share was down but certainly.
On the IPO side, but certainly happy that.
Individually when we look at spec and non spec that we're doing very very well there.
Yes and no.
Specs, obviously result in the specs, so thats, what being well positioned on the M&A side as well.
Got it and then.
On the compliance you mentioned in the compliance side of revenues in the fourth quarter were up year on year I understand the seasonality there on the fourth quarter.
Any color on.
While the war.
When they were higher than expected.
I think on correctly.
Well, yes from it I don't think seasonality would play into two of year over year.
The comparison, but certainly.
We commented on market share of being slightly up.
Some additional 8-K volume et cetera.
Right. Yeah. This is current.
Some of the some of the compliance here is driven on the transactional side. So just as Dan said.
Dave which is the.
<unk>, Inc.
Charles and the robust enough that you saw on the trans side.
Got it and then.
Couple of more I understand your comments Dan about your.
On our capital allocation of the us.
Status correctly, no real big M&A.
Basically the new Capex is going to be on internal software product development to grow on.
Areas as it relates to compliance management.
Yes, so we continue to look at M&A aggressively but.
We're disciplined on what things are worth.
And so to US right what it means for our business.
Yes, we've increased we see great opportunity in our internal development.
Both for venue as well as per the compliance platforms.
One of the things I think Dave may of rent referenced earlier on the investment company side.
As you know.
The print is going away the $135 million.
The next in 2021.
We're extremely well positioned for our total compliance management product, which leverages our software and so we've we've that's we're investing behind those software products to drive to drive the growth, but relative to capital allocation I think you've got it right.
We'll continue to look at debt M&A.
But we're realistic about.
The price of thing multiples multiples.
All of US again, congratulations what a wonderful job on.
The first forming the company.
And pushing of cash flows.
Thank you I'll kick it off on thank you Raj. Thank you the true.
Okay.
There are no further questions at this time I will now turn the call back to that because I'm curious for closing remarks.
Great. Thank you very much and thank you for everyone for joining us and we will speak to you again in May.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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