Q3 2021 Donnelley Financial Solutions Inc Earnings Call
Because remarks, there will be a question and answer session.
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Thank you.
Mike Dell you May begin your conference.
Thank you.
Good morning, everyone and thank you for joining with your modem and financial Thank you for joining o'donoghue for any of those who was wondering warned hurdles conference call.
This morning, we released our earnings report, including a supplemental funding schedule of historical results.
Copies of which can be found in the investors section of our web site at different solutions Dot com.
During this call will refer to forward looking statements that are subject to risks and uncertainties for.
For complete discussion please refer to the cautionary statements included in our earnings release and further detailed in our most recent annual report on Form 10-K.
Quarterly report on Form 10-Q, and other filings with the SEC.
Further we will discuss 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.
And is an appropriate way for you to evaluate the company's performance. They are however provided for informational purposes only please refer to the earnings release and related tables for GAAP financial information and reconciliations of gap to non-GAAP financial information.
Am joined this morning by Dan Leeb, Dave Gardella.
Meg Clay, Eric Johnson, Floyd streamlining and Tammy Turner.
I will now turn the call over to Dan. Thank.
Thank you Mike Good morning, everyone and from all of US to defend we hope that you and your families are staying safe and healthy.
I am very pleased with our record third quarter financial results.
Four I go into details on the quarter I'd like to highlight two important milestone to be reached.
First in October we celebrated defense fifth anniversary as a Standalone company.
Want to thank the entire decent team for their dedication and hard work over the course of these five years together our employees are leading defense transformation from a financial printer to a leading provider of innovative software and technology enabled financial regulatory and compliance solutions.
Over the last five years guided by our vision, we executed significant business transformation initiatives to position defend for long term profitable growth a key component of the transformation was an acceleration of software development, which enabled us to upgrade the capabilities of existing.
Products as well as launch new software solutions to help our clients manage the revolving regulatory compliance and transactional workloads.
A good example of this is the new active disclosure platform.
A cloud based tool purpose built for SEC reporting, which we launched earlier this year to assist clients with their compliance needs.
Through new active disclosure and other proven products, we have created a comprehensive software portfolio that spans both transactional in compliance and markets and when combined with our expertise in scale and technology enabled services, we offer our clients and unmatched ecosystem of regulatory and compliance solutions.
At the same time, we scaled our software offerings and technology enabled services. We also took actions to strategically reduce are low margin print and distribution revenue and significantly downsize or print production platform five years ago at the time, a spinoff Prince and distribution sales accounted for Approx.
Nearly 40% of our total sales and we had a margin profile consistent with such a sales mix.
Over the course of the last five years with our focused efforts to accelerate software sales growth, we managed to expand our product pipeline improved sales and marketing capabilities and established third party partnerships all aimed at driving the adoption of our software solutions offerings.
We've expanded our year over year EBITDA margin for the last nine consecutive quarters and as of the third quarter are trailing four quarter. Adjusted EBITDA margin is 27.6% compared to a margin of 16.5% at the end of 2016.
Looking forward, while our margin benefits from the current very strong corporate transactions offering our business mix has changed favorably and positions us well.
During the quarter, we achieved a second major strategic milestone for the first time in the company's history, both within the quarter and on a trailing four quarter basis net sales from software solutions exceeded net sales of print and distribution. This was a significant achievement in our strategic evolution and and.
Other proof point that our strategies delivering excellent solutions to our clients, which in turn positions us to continue to deliver strong returns to our shareholders.
Not only are we pleased with the result of the strategic transformation to date, we remain confident in our ability to achieve the 44 in 2004 strategy, specifically targeting 44% of our sales from software solutions by the year 2024, and more importantly, the resulting financial.
Profile from such a business mix.
Now turning to the third quarter results total sales grew 18, 2% from last year's third quarter marketing the highest third quarter sales in the company's history. Despite the expected decline in print and distribution related sales, which was down 32.7% in the quarter.
The strong pace of transactional activity coming into the quarter accelerated throughout Q3, boosting sales across our transactional and compliance offerings, excluding print and distribution year over year net sales increased 35.9% in the quarter as software solution sales grew 35.
6% and Tech enabled services grew 36%.
Software solutions sales totaled $69.3 million, marking yet another all time quarterly record for Diffin, the 36% sales growth in software solutions is a continuation of the very strong sales growth trend that began in the first quarter of this year year to date or software solution sales have grew.
134% versus the first nine months of 2020.
We've received positive market feedback and strong client adoption of our recent product launches, particularly active disclosure and total compliance management a component of art digital offering along with our pro all contributing to the 27% growth in our recurring compliant software sales.
In addition, our transactional software product venue achieved another all time high for quarterly sales and grew 53% year over year, largely driven by an increase in M&A deal activity, including dees back transactions as well as what we once again believed to be market share gains as I mentioned earlier.
We are the strength of the capital markets transactional activity accelerated in the third quarter, coupled with our strong market share we achieved robust sales growth with transactional sales increasing 49% from the third quarter of 2020.
The growth and higher margin software solutions and Tech enabled services net sales are proactive pruning of low margin print work along with the significant impact a permanent cost reductions resulted in record quarterly earnings <unk>.
Third quarter non-GAAP, adjusted EBITDA was $82.5 million, an increase of over 73% from last year's third quarter and adjusted EBITDA margin was 33, <unk>, 3% up 1060 basis points from the third quarter of 2020 adjusted EBITDA margin.
As I noted earlier are trailing four quarter adjusted EBITDA margin is currently 27, 6%.
We achieved record free cash flow in the quarter of $100.4 million, an improvement of $32.8 million for.
From the third quarter of last year.
At quarter end or non-GAAP net debt was lower than last year's third quarter by $142 $9 million, resulting in a non-GAAP net leverage of four times, one one times lower than the third quarter of 2020.
Subsequent to the end of the quarter, we completed the previously announced redemption of are eight and a quarter senior notes. This transaction not only improves our capital structure by providing additional financial flexibility, but it will lower our interest expense, resulting in cash savings Dave will provide more detail on this topic.
Before I share a few closing remarks, 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.
Thank you Dan and good morning, everyone before I discuss our third quarter financial performance I would like to provide an update on the item Danjus mentioned the redemption of are eight and a quarter senior notes.
On October 15th the first call date, we completed the redemption of the remaining outstanding notes balance of $233 million at the redemption price of approximately 100 too we.
Refinance the notes redemption with a combination of proceeds from a 200 million dollar delayed draw term loan facility and cash on hand.
For purposes of reporting our third quarter balance sheet. The portion of the repayment not financed by the long term portion of the loan.
Or approximately $41 million what's.
Was classified as short term debt.
Following this transaction our annual interest expense will decreased by approximately $14 million at current interest rates.
As I noted in the past while this structure subjects, our debt to interest rate movements of rising rate environment would reduce the net liability related to our defined benefit pension plans decreasing the level of required contributions and potentially allow us to a new it ties the plans a <unk>.
Emanating altogether or net pension liability and the related future contributions.
Now turning to our third quarter financial performance.
After a strong first half of the year, we delivered another quarter of excellent results highlighted by 18, 2% sales growth and record high quarterly non-GAAP adjusted EBITDA, adjusted EBITDA margin and free cash flow.
We extended our strong position in a very active capital markets transactional environment and posted 35, 6% growth in our software solution sales all while continuing to drive operating efficiencies.
On a consolidated basis net sales for the third quarter of 2021, or 247 $7 million, an increase of $38.2 million or 18.2% from the third quarter of 2020.
Third quarter of 2021 net sales represented the highest third quarter in the company's history.
Software solutions net sales in the third quarter increased by $18.2 million or 35, 6%, primarily due to an acceleration of virtual data room activity and venue driven by a robust M&A environment.
In addition, solid subscription growth and active disclosure as well as continued strong client adoption with an arc sweet contributed to the strong performance.
Tech enabled services net sales increased by 37 $6 million or 36%, primarily due to increased capital markets transactional and compliance activities.
Printed distribution revenue decreased by $17.6 million or 32.7%.
Primarily due to regulatory driven reduction in demand for printed materials within investment companies and less commercial printing, where we are proactively exited certain low margin contracts.
This decline was partially offset by higher print related sales as a result of the increased transactional activity within capital markets.
Third quarter non-GAAP gross margin was 62.4% approximately 1600 basis points higher than the third quarter of 2020, primarily driven by a favorable business mix featuring growth and higher margin Tech enabled services and software solution sales combined with lower overall print volume.
And the impact of ongoing cost control initiatives.
Not enough SG&A expense in the quarter was $72.1 million $22.4 million higher than the third quarter of 2020 as a percentage of net sales non-GAAP SG&A was 29, 1% an increase of approximately 540 basis points from the third quarter of 2020 the.
Increase in non-GAAP SG&A is primarily due to sales commissions on higher sales changes in the business mix and higher incentive compensation, partially offset by the impact of ongoing cost control initiatives.
Our third quarter non-GAAP, adjusted EBITDA was $82.5 million, an increase of $34.9 million or 73, <unk>, 3% from the third quarter of 2020 or.
Our third quarter non-GAAP adjusted EBITDA margin reached a record high of 33, 3% an increase of approximately 1060 basis points from the third quarter of 2020, again, primarily driven by a favorable sales mix and ongoing cost control initiatives, partially offset.
By higher incentive compensation and selling expenses.
Turning now to our third quarter segment results net sales in our capital market software solutions segment, where $48 $1 million, an increase of 41.1% from the third quarter of 2020, primarily due to increased venue virtual data room activity and continued growth and active disclosure.
Subscriptions.
A new sales increased approximately 53% from the third quarter of 2020 to reach a record high driven by strong M&A activity as well as our in market execution that boosted year over year growth and resulted in what we believe to be market share gains.
Recurring compliance products, featuring active disclosure and filed 16 also had a solid quarter posting approximately 30% growth in aggregate.
Non-GAAP adjusted EBITDA margin for the segment was 24, 3% a decrease of approximately 90 basis points from the third quarter of 2020. The decrease in non-GAAP. Adjusted EBITDA margin was primarily due to higher incentive compensation and selling expenses, partially offset by the increased sales.
A favorable sales mix as well as the impact of operating efficiencies.
Net sales in our capital markets compliance and communications management segment, where $142.5 million an increase of 48, 3% from the third quarter of 2020, primarily due to robust capital market transactional activity and acceleration of the trend that began in the third quarter of 2000.
20 this.
This growth was largely driven by the increase momentum and IPO activity as well as strong M&A activity, including the spec transactions.
Not yet adjusted EBITDA margin for the segment was 55% an increase of approximately 570 basis points from the third quarter of 2020.
The increase in non-GAAP adjusted EBITDA margin was primarily due to the increased sales volume and a favorable sales mix, partially offset by higher selling expense.
After an unprecedented level of spak ipos during the first quarter. This year, new spec formations fell sharply in the second quarter and rebounded modestly in the third quarter more importantly, the completed spec transactions and have created a pipeline of more than 400, new public companies that are <unk>.
Actively looking for acquisition targets.
We saw evidence of this heightened activity level in the third quarter as the pace of public debuts via D spec mergers accelerated.
A strong market position in the transactional filing business positions us well to capture a significant portion of future the spec activity, which on average represents 10 times the value of initial registration transaction. Additionally, these transactions provide a pipeline for recurring software <unk>.
<unk> to support our clients ongoing compliance requirements.
At sales and our investment company software solutions segment or $21.2 million, an increase of 24, 7% from the third quarter of 2020, primarily due to the momentum and arc digital total compliance management offering in the quarter, which continues to stand out as a preferred digital alt.
<unk> turn in foreign investment companies as they continued to transition away from sprint.
In addition growth in our pro related to new subscription activity in organic growth from existing clients also fueled the growth in this segment.
Non-GAAP adjusted EBITDA margin for the segment was 23% a decrease of approximately 560 basis points from the third quarter of 2020. The decrease in non-GAAP. Adjusted EBITDA margin was primarily due to higher incentive compensation expense and increased allocations of overhead expense partially.
Offset by an increase in gross profit margin and the impact of ongoing cost control initiatives.
Net sales in our investment companies compliance and communications management segment, where $35.9 million, a decrease of 26 $4 million or 42.4% from the third quarter of 2020 due to the impact of regulatory change and investment companies affecting prep.
[noise] related sales and a reduction of commercial printing sales related to contracts we are proactively exited.
Non-GAAP adjusted EBITDA margin for the segment was nine 7% approximately 650 basis points higher than the third quarter of 2020.
The increase in non-GAAP adjusted EBITDA margin was primarily due to reduction in overall expense within the segment, primarily due to cost savings as a result of consolidation of our platform and a lower allocation of overhead costs, which are now being absorbed by our three other operating.
Segments as the lower activity level in this segment results in reduced need for such shared resources.
We remain on track to shift 85% to 95% of our print needs to our third party vendor network by year end, 2021, which will allow us to variabilize the cost structure for the majority of our print production.
We will continue to operate our own digital only platform to meet the demand for higher value quick turn requirements.
Regarding the regulatory change that will continue to reduce demand for print in this segment. We continue to expect an overall reduction in print related net sales of approximately $130 million to $140 million and a reduction in non-GAAP adjusted EBITDA of approximately $5 million to $10 million re.
Related to the regulatory change with the vast majority impacting 2021.
We now expect 2021 reductions to net sales and adjusted EBITDA to be approximately 110 million and $5 million, respectively with the remaining net sales and EBITDA impact of $30 million and $3 million respectively to occur in 2022 two.
Clear the aggregate expected impacts are in line with previous guidance.
Non-GAAP unallocated corporate expenses were eight $9 million, a decrease of $1.6 million from the third quarter of last year. The decrease in unallocated corporate cost was primarily due to lower third party expenses, partially offset by increased incentive compensation driven.
By the strong performance.
Free cash flow in the quarter was $100.4 million, a quarterly record representing an improvement of $32.8 million from the third quarter of last year the.
The improvement in free cash flow was primarily due to flow through of higher adjusted EBITDA, partially offset by increased capital expenditures.
We ended the third quarter with $231 million of total debt and 108 $1 million of non-GAAP net debt or net available liquidity at the end of the third quarter was $426 million, which was comprised of 297 $7 million of availability.
On a revolver and $122.9 million of cash on hand.
As of September 30th 2021, or non-GAAP net leverage ratio was 0.4 times down 1.1 times from the third quarter of last year.
The company repurchased approximately 238000 shares of common stock during the quarter $482 million at an average price of $34.37 per share as of September 30th we had approximately $31.4 million remaining on our $50 million.
Stock repurchase authorization.
As it relates to the fourth quarter transactional activity in capital markets remained robust throughout October regarding our outlook for the full quarter. We are expecting consolidated net sales to be in the range of $215 million to $225 million.
Up approximately $10 million or 5% year over year at the midpoint due to the continued growth in our software products as well as the ongoing strength in the capital markets transactional environment, albeit against much tougher comps as last year's fourth quarter transactional activity was also robust.
This growth will be partially offset by the planned reduction in print and distribution sales.
We remain bullish on the near term outlook for our software solution sales as well as on the capital markets transactional activity from a profitability perspective in the fourth quarter, we expect and non-GAAP adjusted EBITDA margin in the low to mid 20% range and representing the 10th consecutive quarter of year over year Mark.
Arjun improvement.
With that I will now pass it back to Dan.
Thanks, Dave over the course of the last five years through the dedication and hard work of our defend associates. We've made significant progress in transforming our business from a financial printers to a leading provider of innovative software and technology enabled financial regulatory and compliance solutions.
It represents fundamental change in how we operate to reach this point.
And through that process, we become a more focused predictable and profitable company.
The best News is the work and opportunity ahead exceeds what's behind us to deliver increasing value to our clients employees and shareholders for.
For the next phase of our journey, we remain focused on accelerating software innovation, increasing adoption and consumption of our software and service offerings and operating with speed and efficiency.
Our latest results are a testament to the scale and pace of our transformation. We have achieved five consecutive quarters of year over year sales growth. Despite significant regulatory driven reductions in print sales and record quarterly adjusted EBITDA, adjusted EBITDA margin and free cash flow.
We are tracking ahead of our long term targets and we are on our way to achieve the 44 in 2004 strategy, including the associated financial profile.
Before I wrap up let me say a few words on a recent announcements on several strategic partnerships.
As we operate in an increasingly connected and dynamic marketplace, we recognize the importance and benefit of partners, who is offerings can supplement or extend our own product and go to market capabilities.
In that regard we are in the early days of creating a partner ecosystem, which had many ways can enhance the level of service productivity and convenience to our clients.
And in so doing contribute to a recurring revenue growth.
In the third quarter, we announced partnerships with diligent Corporation the leader in global SaaS governance, and with payables automation solutions provider to policy.
These relationships will allow us to engage the pre IPO clients earlier and partner with them on a host of IPO readiness activities, while introducing them to our portfolio of regulatory and compliance software products earlier in the purchase cycle as I mentioned, we are in the early days of creating a partner ecosystem and.
And we look forward to benefiting from those partnerships.
In closing we are excited about our very strong third quarter and year to date results and remain keenly focused on executing against the 44 and 24 strategy.
Before we open it up for Q&A I'd like to thank the decent employees around the world who have been working tirelessly to develop new products maintain our operations and ensure our clients continue to receive the highest quality service without disruption.
Stay healthy and safe.
Now with that operator, we're ready for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause for just a moment to composite Q&A roster.
Yeah first question comes from the line of Peter Heckman of da Davidson.
Your line is open.
Hi, doing this is John on for Pete just wanted to ask a quick question can you guys provide a little more detail on the revenue from destock activity and how they compare to.
Last year.
Yes, John So we don't break that out separately is just part of our overall.
Mmk and obviously the bigger transactional category.
If you look on the Investor site, we do show a more detailed breakout of the revenue within capital markets of which the transactional comparison is posted there.
Got it got it and.
Given the number of moving parts can you guys provide any just preliminary thoughts on top line growth in 2022.
Yeah, we haven't finished the planning cycle, yet and we will give guidance on.
22.
At least we have done historically for the early part of the year.
On the on the fourth quarter call and so look forward to talking about that in February.
Okay got it got it just concluding and one last one just any update on competitive dynamics in the virtual data room space.
Yeah.
There is what we've said in our prepared comments.
Thanks for the question first of all but.
We have visibility into some of the competitors.
We feel very good with our performance.
We look at the performance year to date, our sales are off.
And that.
45%.
Year to date and it's been increasing.
Going back to essentially the second quarter last year, we've had to successive increases in ramping up.
Two this quarter of up 53%.
We have don't have great visibility into all participants, but feel pretty good that.
Our product is fantastic the security components of it really strong.
Resonates with clients the bread.
Connection is very helpful and we feel like that's being recognized in the marketplace.
Got it thanks, so much.
Ya.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Your next question comes from the line of Charles Strawser of Cj's Securities.
Your line is open.
Good morning.
Morning Kara.
So obviously, a very strong quarter.
Transactional sounds like it was really off the charts here and.
At your cue for guidance that looks like <unk>.
Maybe a tad conservative just given the.
The trends, we're seeing right now in the capital markets.
Kind of the ongoing IPL market M&A you mentioned these backing.
400, plus companies looking for targets.
Talk a little bit more about you in queue for guidance there and.
What could cause that.
A higher number.
Yeah, Great Charlie.
Have some comments on the guidance for Q4 and then.
[noise] correctly will will add add some color here.
So we did in fact, as we said in our prepared remarks see the robust activity continue through October.
If you rewind back to August when we were doing the second quarter call. We made similar comments about what we saw the star Q3 in July and obviously.
That ramped up throughout the quarter.
It still remains the part where we have the least amount of visibility.
And I would say that you are right to the extent that the.
The activity remains.
At the levels that we've seen in October we certainly have a chance to outperform that guidance, but given the limited visibility the timing of these transactions.
We're.
Hedging against that a little bit.
Hello.
So David I think to build on that October looks to be more of the same and regardless of the market, where we're going to look outperform that.
You look at just the numbers mentioned in the remarks over 400 Sparks that are searching for their business combinations.
There's 300 stocks that are in registration.
And over 120 Sparks pending dees back. So Q3 saw an increase over Q2, it's still far off of Q1.
Certainly reasons for caution the recent lackluster aftermarket performance of Sparks.
Both pre and post acquisition could cause downward pressure, but one of the real story here. This backwards IPO spak is creating an ecosystem.
That's increasing public companies and a perfectly aligns with our value position that Dan described we're.
We're supporting our working groups with software and managed services.
They are using active disclosure, they're using venue a pipe they're using venue as the sparks target.
Looking for someone to acquire as Dan said powered by artificial intelligence.
<unk> has been supporting the disc back a much more complicated deal.
And then we have contracted new recurring revenue with that new public company using active disclosure for their formal compliance reporting.
So the market wants what we built we're going to be ready for any market.
And we're excited for Q4.
That's really helpful and it actually has a great segue into my next question was.
Regarding that these backing and.
What do you think you're kind of uptake is from.
That you handled VIP O four through the <unk> process now.
Very high uptake.
Uptake rates.
From those companies.
And when you say uptick your clarification of.
Do they find a target or are they using us going for the just maybe expand on a question.
Yeah, just seeing if you did the IPO for this back in now that these backing are you handling that these <unk>.
Percentage of homes that are actually used continuing to use you as that these back provider.
Those be correct got it yes.
Yes, so we are handling.
The spak the spec typically has a much smaller document.
Then is leading to the <unk>, which can be.
Much more complicated.
Acquisition right.
And our share a follow on share extremely strong what we're also finding is that in deals that we did not do this back we have a real opportunity because often the defect happening.
<unk> has been cut off from.
Years months and weeks, we're often planning those deals become extremely complicated and they're upgrading and changing their working group they're deal team and that's very advantageous to us. So we're picking up the sparks for stocks that we did not initially do.
Great.
Very helpful. Thank you yes.
Yes.
The only thing I would add.
Sorry, the only thing I would add to that is.
That.
When we look at active disclosure and the new active disclosure and the.
IPO market Eastpac's et cetera.
And to Craig's point the high attach right. There is also a very high attach right into the compliance area and so we're able to take that client through the process and continue on with them serving them.
The active disclosure.
Alright, that's excellent. Thank you and thank you again for the.
Putting that in.
More information and those tables I haven't had a chance to really look through it obviously it during the call here, yet, but maybe you can talk a little bit more about kind of the incremental Utah margin benefit you saw in Q3 from transactional.
Trying to give us a better sense of how to think about that.
Kind of core recurring revenue as well and how we should think about modeling out.
Q for guide by segment as well thank you very much.
Yes, Charlie and I think when you think about incremental revenue.
Just to clarify it's not all the transactional that's driving it I think when you look at the growth we've seen on the software solutions we get.
Excellent.
Incremental margin there.
I think when you look at.
As well as the print platform and the reduction in print revenue just the overall mix between increased transactional increased software and less print.
It is kind of the perfect storm to build.
The higher.
Higher margin.
One of the things I want to comment too is if you look at.
Some of the software the segments from a a fully loaded margin on a year over year basis.
We made the comments in our prepared remarks that from an allocation perspective, some of the shared cost just given the decline in GIC.
Compliance and communications management some of those the shared costs now get pushed through the software segments. I think when you look at their margin. In addition to the higher amount of shared costs that they're absorbing.
The extra incentive compensation based on total company performance since and some of the investments, we're making on the technology side.
Impacting those margins negatively, but but overall very happy with it.
What will get on an incremental basis, and then I think when you look ahead on the margins by segment.
A lot of that will will depend I think when you look at.
The software segments.
We think probably in line, maybe a little bit better than what we're reporting here in Q3.
And then on the capital markets.
Supplies and communications management segment, a lot of that will just be be driven by the amount of.
Transactional activity that ends up going through.
Great. That's very helpful. Thank you guys.
Yes, Thank you Charlie.
Ooh.
Okay.
With with no more questions.
We will.
C in February for the queue for a call. Thank you.
This concludes today's call you may now disconnect.
[music].