Q2 2022 Donnelley Financial Solutions Inc Earnings Call
And expand our software offerings, we view such organic investments is a high priority and will remain disciplined in our investment decisions, taking a staged investment approach to ensure projects are generating returns at or above required levels.
In addition to delivering strong financial results during the quarter. We also made significant progress in the return of capital to shareholders, an important component of our long term value creation framework, we repurchased two 2 million shares during the second quarter of 2022, bringing our second quarter year to date repurchases.
Is the $3 4 million shares.
At quarter end, we had $59 million remaining on our share authorization, which we intend to fully utilized by the end of 2022.
Our solid financial results and prudent capital allocation continue to provide us with ample financial flexibility, which is reflected in our quarter and non-GAAP net leverage of <unk> eight times.
One times lower than the second quarter of 2021.
Finally, we took important steps to enhance deepens organizational talent and leadership capabilities to support our long term growth plans as.
As we transform <unk> into a software centric company, we continue to invest to drive client engagement improved client experience and increase lifetime value.
As a result earlier this year, we created the role of Chief client experience officer, a position that will oversee client experience for all software offerings throughout deepen Jody.
Jody Sweeney, who recently joined <unk> from Salesforce will lead this client centric organization that will ensure our clients have been outstanding and predictable experience as they move through their lifecycle with defense.
From implementation to support to service.
In addition last month, we announced the appointment of <unk> <unk>. The current Chief marketing Officer of Cooper software through our board of directors as a highly regarded well rounded software executive John Doyle brings more than 20 years of <unk> enterprise marketing leadership in high growth SaaS.
<unk> product offerings, we look forward to partnering with <unk> as we continue to execute on our business plan to drive growth and enhance shareholder value.
As I've noted previously and reiterated today the consistent progress against our plan is driving outstanding results. This year as market environment and our performance have demonstrated deepens ability to thrive in difficult market conditions and showed the strength of our recurring offerings.
These recurring offerings provide our business with stability during times of market volatility, while also allowing us to serve our clients and their evolving regulatory and compliance needs.
One key component of our recurring revenue base is our compliance and regulatory driven software products.
These recurring compliance software offerings grew 13% in aggregate or 14% on a constant currency basis versus the second quarter of last year.
And accounted for approximately 61% of total second quarter software sales the.
The growth of our compliance software offerings led by active disclosure the newest SEC reporting solution on the market, which grew 20% in the second quarter.
More importantly subscription based revenue for new Adv grew 25% in the quarter and important metrics that will help to accelerate our recurring revenue growth.
Since new active disclosures interruption, we continue to make excellent progress in the market and in transitioning clients from our prior platform to new active disclosure, while also realizing higher price levels and longer term subscriptions.
<unk> and strong annual recurring revenue.
<unk> suite the other component of our recurring compliance software offering delivered solid year over year sales growth of 11% or 13% growth on a constant currency basis. Despite last year's strong second quarter.
Driven by regulatory change that allowed us to transition clients from a print solution to a new software offerings.
I am encouraged by the solid subscription revenue growth across our pro and arc reporting solutions, helping to more than offset a normalized demand profile for our digital total.
Total compliance management solution, which had a very strong adoption in 2021 following its introduction in response to regulatory change.
The second component of our recurring revenue comes from compliance related offerings within both of our compliance and communications management segments. These.
These recurring revenues are based on capital markets compliance activities and services base compliance solutions within investment companies two offerings not directly affected by the current volatility of the capital markets transactions environment and the secular decline in print and distribution.
Buying these offerings assist our corporate our mutual fund clients to become and remain compliant with SEC regulations and are predominantly recurring in nature with very strong customer retention rates.
In the second quarter total compliance sales reached nearly $100 million and grew 26% versus second quarter of 2021 the.
The strong growth in the second quarter is primarily driven by an increased volume of capital markets regulatory and compliance filings the robust IPO and spec environment of 2021 increase the number of public companies, while growing the demand for SEC compliance related services.
We are well positioned in this space to continue to leverage our client centric service model operating scale and domain expertise to further drive recurring compliance revenue.
Our dual compliance platform is comprised of traditional offerings and software offerings allow us to support our clients in the way they prefer to work with continued growth in both our recurring compliance software and compliance offerings within capital markets and investment companies is an important step in the transformation of our business mix.
And financial profile to become more predictable and resilient regardless of market conditions.
While our compliance solutions continued to gain traction our transactions based offerings by their nature are subject to volatility inherent in the capital markets steel environment.
The second quarter transactional market remained challenged with a continuation of the very soft the IPO market, we experienced in the first quarter and very few large M&A deals being completed specifically global IPO activity was down 90%.
And the M&A market, while more resilient than the IPO market was down 20% from last year's second quarter.
Additionally, the spec market, which produced a record number of spec registrations in 2021 remains largely on pause in the second quarter.
Against the backdrop of a very challenging transaction environment I am encouraged by the fact, our transactions based offerings performed better than the overall market.
Our capital markets transactional revenue declined 22% in the second quarter, which within the context of the current environment outperformed the broader market. Additionally, transactional revenue in the second quarter increased sequentially from the first quarter.
Let me highlight two drivers behind our transactional revenue performance that enabled <unk> to deliver better results than the market first our clients are continuing to work such as updating their filings with current financial statements to remain ready for when market stability returns our clients deal team's perspective as well as public comp.
Terry from investment banks confirms that activity levels and engagement are still quite high with deals being pushed out to an undetermined time.
<unk> is actively assisting several hundred clients with their transactions and our work on those transactions is continuing even in the absence of completed deals.
When market volatility geopolitical unrest and investor confidence stabilize a healthy pipeline of profitable companies will be ready to list secondly.
Secondly, as the transactional market statistics are based on the total number of deals. They don't fully account for defense strong position within the market for larger or more complex transactions, which generate more value for the service providers are.
Our industry, leading capabilities to serve large and complex deals and our strong market share within those larger transactions helped us to deliver strong transactional revenue.
Even in a lower deal count environment.
Similarly, our transactional software offering venue performed better than its primary use case.
M&A.
But the global M&A market down approximately 20% year over year in the second quarter the level of underlying activity taking place on our virtual data room platform remained resilient, enabling venue to achieve a similar level of sales compared to the second quarter of 2021, which was up 50% from the second quarter of 2000.
21.
When excluding the impact of foreign exchange rates venue posted modest sales growth of 2%.
Finally, our strong second quarter results were made possible by our team of nearly 200 employees worldwide, who share a common purpose of serving our clients by providing superior software solutions deep domain expertise and best in class service.
Since we became an independent company nearly six years ago, the development of our people and culture had been at the forefront of our management agenda through.
Through continued focus benchmarking with leading companies and investments in our employees, we have made meaningful progress, resulting in defense being a great place to work.
Internally, we are receiving positive feedback from our employees on our updated career in compensation framework initiatives that advance diversity equity and inclusion and are fully flexible work environment.
Donnelley, we continue to be recognized for the progress we are making to transform our culture and enhance the employee experience I am pleased that deepen has recently achieved certification as they most loved workplace a covenant accolade promoted in Newsweek magazine that validates our ongoing commitment to.
Creating an inclusive environment, where employees can do their best work every day.
I believe if we continue to do the right things, we will continue to be an employer of choice and deliver superior results for our clients and shareholders.
Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our second quarter results and our outlook for third quarter Dave.
Yes.
Thanks, Dan and good morning, everyone as Dan noted, we delivered very strong second quarter results in a challenging environment.
Quarter featured consolidated year over year constant currency revenue growth higher adjusted EBITDA and adjusted EBITDA margin and increases in both operating cash flow and free cash flow from last year's second quarter.
By continuing to focus on operating efficiencies, while also improving our sales mix, specifically more software and less print sales.
<unk> second quarter, adjusted EBITDA margin by approximately 110 basis points compared to the second quarter of 2021.
Our second quarter results provide additional positive proof points that our strategy is working allowing us to deliver outstanding results. While also continuing to invest in the evolving to a more recurring sales mix.
<unk>, managing our cost structure and being disciplined stewards of capital.
On a consolidated basis net sales for the second quarter of 2022 were $266 2 million a decrease of $1 $3 million for zero point.
5% from the second quarter of 2021.
The negative impact of foreign exchange rates was $2 1 million accounting for more than all of the year over year sales decline.
On a constant currency basis second quarter net sales increased <unk>, 3% versus the second quarter of 2021.
Software solutions net sales for the second quarter were $71 6 million, an increase of $5 million or seven 5%.
Our recurring compliance offerings, which include active disclosure in arc suite delivered 13% sales growth in aggregate.
Active disclosure continued to demonstrate strong sales momentum growing approximately 20% in the quarter.
And arc suite net sales grew 11% in the quarter driven by subscription revenue growth.
Tech enabled services net sales were $133 $3 million, a decrease of zero point $7 million was <unk>, 5%.
The decreased capital markets transactional activity, which was almost entirely offset by higher compliance volume within capital markets and growth and invest in companies Tech enabled services net sales.
Print and distribution net sales were $61 3 million.
The decrease of $5 6 million.
Or eight 4% due to the regulatory driven reduction in demand for printed materials within investment companies, partially offset by price increases.
Second quarter non-GAAP gross margin was 58% approximately 200 basis points higher than the second quarter of 2021, primarily driven by a favorable sales mix and the impact of ongoing cost control initiatives.
Actually offset by lower capital markets transactional activity.
non-GAAP SG&A expense in the quarter was $71 8 million.
A $1 8 million increase from the second quarter of 2021.
The increase in non-GAAP SG&A is primarily driven by higher sales and marketing expenses due in part to incremental expenses related to our in person annual sales meetings, which were held virtually in 2021 as well as additional investments in product development and technology, partially offset.
And by the impact of ongoing cost control initiatives and lower incentive compensation expense.
As a percentage of net sales non-GAAP SG&A was 27% an increase of approximately 80 basis points from the second quarter of 2021.
Our second quarter adjusted EBITDA was $82 6 million, an increase of $2 7 million or three 4% from the second quarter of 2021 or.
Our second quarter adjusted EBITDA margin was 31% an increase of approximately 110 basis points from the second quarter of 2021, driven.
Driven by growth in capital markets compliance volume and a favorable sales mix within investment companies compliance and communications management segment, the impact of cost savings initiatives and lower incentive compensation expense, partially offset by lower capital markets transactional volume.
As Dan mentioned earlier, our second quarter adjusted EBITDA margin is much stronger than our historical margins in quarters with similar overall in transactional revenue.
To illustrate this in more detail in the second quarter of this year on a similar level of transactional sales and a slightly higher level of overall sales compared to the second quarters of 2019 and 2020. This year's second quarter adjusted EBITDA of $82 $6 million is 26.
$5 million and $21 $8 million higher than the second quarters of 2019 and 2020, respectively.
From a margin perspective second quarter 2022, adjusted EBITDA margin was 31% compared to 21, 7% and 23, 9% in the second quarters of 2019, and 2020, respectively or.
Our focused efforts to reduce fixed costs across the business and the variable is our cost structure in specific areas have positioned <unk> to be more sustainable and resilient throughout market cycles.
Turning now to our second quarter segment results net sales on our capital markets software solutions segment were $46 3 million an increase of five 7% from the second quarter of 2021.
Excluding the negative impact of foreign exchange rates net sales increased six 8% year over year.
The increase in net sales is primarily due to the performance of our recurring compliance product active disclosure, which had another strong quarter posted a 20% growth and marking the sixth consecutive quarter of double digit sales growth.
Sales of our virtual data room offering venue were in line with the second quarter of last year. Despite a much lower level of overall transactional activity this year.
Similar to what we experienced in the first quarter. When you continue to outpace the market trend of its primary use case M&A during the second quarter.
With M&A activity down approximately 20% on a year over year basis in the second quarter.
We are encouraged by the resiliency of venue sales.
Adjusted EBITDA margin for the segment was 19% a decrease of approximately 1000 basis points from the second quarter of 2021.
The decrease in adjusted EBITDA margin was primarily due to an unfavorable sales mix incremental product development and technology investments higher sales and marketing expenses and increased allocation of overhead partially offset by higher sales price uplift on new AED.
And the impact of cost controls.
As a reminder, the margin structure for active disclosure contains costs associated with supporting both the <unk> and new platforms.
We expect to materially complete the transition from 83 to new a b by early 2023, which will eliminate the duplicative technology cost further improving the margin profile of active disclosure and the segment is all.
Net sales in our capital markets compliance <unk> Communications management segment were $150 million, a decrease of $3 $1 million or 2% from the second quarter of 2021.
Due to lower capital markets transactional activity, partially offset by higher compliance volume.
As Dan mentioned similar to the first quarter the capital markets transaction environment remained very soft in the second quarter, which continued to weigh on IPO back in M&A activities, while persistent macroeconomic and geopolitical headwinds remain the fundamental drivers of dealmaking are strong.
We remain encouraged by the continued work our clients are undertaking with the support from defense to remain prepared for transaction when market stability returns.
That robust level of underlying activity across our pipeline of several hundred in process Ipos and a relatively resilient M&A market, including continued destock transactions translate into a solid pipeline of revenue opportunities for defense.
While the majority of our revenue is recognized at the closing of the transaction certain deal activities such as initial filings generate revenue while the transaction is in process and as milestones are achieved.
The volume of those in process deal activities gives us confidence that those activities will lead to substantial future revenue when the market volatility subsides.
The decline in capital markets transactional revenue was partially offset by the growth in capital markets compliance <unk>.
Second quarter capital markets compliance revenue of $76 million represents a quarterly record and grew 31% year over year.
The strong growth in the quarter was driven by increased compliance volume as a result of higher customer count and market share gains as well as price increases on additional services.
Unlike the volatility inherent in the transactional activity the vast majority of our capital markets compliance offering supports our corporate clients with their recurring SEC compliance needs.
Deepens domain expertise strong service culture and ability to serve clients across their life cycle have positioned us well to capture a significant portion of newly formed public companies and continue to expand our share.
In the second quarter, which is the peak season for compliance filings. We saw the result of our success.
Supporting customers on their private to public journey and winning the follow on recurring compliance work.
Adjusted EBITDA margin for the segment was 41, 2% a decrease of approximately 220 basis points from the second quarter of 2021.
The decrease in adjusted EBITDA margin was due to the lower transactional sales, partially offset by lower selling expenses and cost savings initiatives.
Net sales in our investment company software solutions segment were $25 $3 million, an increase of 11% from the second quarter of 2021, which was also a very strong quarter.
Excluding the negative impact of foreign exchange rates net sales increased 12, 8% versus the second quarter of 2021.
Year over year growth was driven primarily by subscription revenue growth in our pro and our reporting two products within our <unk> suite offering.
As expected demand the demand for our digital our total compliance management offering which was a big driver of the net sales growth for this segment in 2021 following the initial adoption.
Was more normalized in the second quarter.
Going forward, we expect the normalized growth profile for our digital to continue.
Adjusted EBITDA margin for the segment was 34% an increase of approximately 460 basis points from the second quarter of 2021 the.
The increase in adjusted EBITDA margin was primarily due to operating leverage on the increase in sales, partially offset by higher product development and technology investments.
Net sales are in our investment companies compliance and communications management segment were $44 6 million a decrease of $3 2 million or six 7% from the second quarter of 2021 due to the impact of regulatory changes and a reduction of <unk>.
Sales related to contracts, we proactively exited.
Adjusted EBITDA margin for the segment was 32, 7% approximately 2180 basis points higher than the second quarter of 2021.
The increase in adjusted EBITDA margin was primarily due to a favorable sales mix featuring more services and less print.
Price increases on the remaining print work and a reduction in overall expenses within the segment, including lower incentive compensation expense and reduce overhead costs based on the lower activity level in this segment.
As we noted previously we have successfully shifted 100% of our offset print production needs to a third party vendor network, creating a fully variable is cost structure.
Going forward, we will continue to operate a digital only current platform to meet the demand for higher value quick turn requirements.
Regarding the regulatory change that will continue to reduce this year's demand for print in this segment, we expect a decline in net sales of approximately $30 million and only at the minimus impact on adjusted EBITDA in 2022.
The majority of this year's regulatory driven decline in print is reflected in our year to date results.
non-GAAP unallocated corporate expenses were $11 $2 million in the quarter flat to the second quarter of last year as increase in expenses aimed toward accelerating our transformation were offset by the impact of ongoing cost control initiatives and lower incentive compensation expense.
Free cash flow in the quarter was $39 million, representing an improvement of $10 million from the second quarter of 2021.
The improvement in free cash flow reflects the year over year benefit of last year's payment of $15 $7 million related to the OFC multi employer pension plan obligation, partially offset by additional capital expenditures in technology development during the second quarter of 2022.
As Dan mentioned.
As of June 32022, our non-GAAP net leverage ratio was 0.8 times down <unk>, one times from the second quarter last year.
As a reminder, our cash flow is historically seasonal we are a user of cash in the first quarter closer to breakeven in the second quarter and generate more than 100% of our free cash flow in the second half of the year.
As our sales mix continues to evolve to proportionately more subscription based software solutions. We expect this seasonality to continue to become less significant.
Regarding capital deployment, we repurchased approximately two 2 million shares of common stock during the second quarter were $64 4 million at an average price of $29 54 per share.
As of June 32022, we had $58 $6 million remaining on our $150 million stock repurchase authorization.
We expect to utilize the remaining stock repurchase authorization in 2022 as part of our broader capital allocation strategy that also includes additional investment in technology development.
As always we will maintain our disciplined approach on all capital deployment decisions.
As it relates to our outlook for the third quarter of 2022, we expect continued market volatility driven by aggressive fed action to combat inflation.
Ongoing supply chain issues, and geopolitical uncertainties, which will continue to weigh on the capital markets transactional environment.
So far in the third quarter priced Ipos and specs remain well below this point last year.
Large M&A deal completions are also below last year's level.
And as Dan and I. Both noted earlier, we are encouraged not only by what we hear from the investment banking community regarding ongoing transactional activity, but also by the continued work our clients are undertaking to remain prepared for a transaction when the market stability returns.
In addition, we expect sales from print and distribution to continue decline, but with a minimal impact to adjusted EBITDA.
We remain bullish on the near term outlook for our software solutions sales and expect continued strength in the growth trajectory of our recurring compliance software offerings.
With that as the backdrop, we expect consolidated third quarter net sales to be in the range of $200 million to $220 million.
And an adjusted EBITDA margin percentage in the mid <unk> and once again much stronger than historical quarters of Lifesize total and transactional.
Our third quarter guidance contemplates similar dynamics as the first and second quarters of this year with continued software growth reductions in distribution net sales and a significant year over year reduction in transactional revenue.
As referenced transactional revenue in last year's third quarter was the highest level it had been and over over the previous five years and grew nearly 50% from the year before.
Based on our market leadership, deepen is very well positioned to capture a significant share of future demand for transactional related products and services.
More importantly, our growing software offerings, when combined with our expertise and scale in technology enabled services enable us to offer our clients an unmatched portfolio of end to end regulatory and compliance solutions.
With that I'll now pass it back to Dan.
Thanks, Dave our performance in the second quarter of 2022 provides us with strong momentum to continue to execute <unk> strategic transformation.
While the macroeconomic outlook remains uncertain the combination of our market position cost structure and strong balance sheet positions us well heading into the back half of the year.
Before we open it up for Q&A.
I'd like to thank the deepen employees around the world. We have been working tirelessly to ensure our clients continue to receive the highest quality solutions stay safe and healthy.
With that operator, we're ready for questions.
Okay.
At this time I would like to remind everyone that in order to ask a question press star and the number one on your telephone keypad.
Cost for just a moment to compile the Q&A roster.
Your first question comes from the line of Charles Strausser.
Your line is open.
Hi, good morning.
Charlie.
If you could talk a little bit.
The compliance related sales you had really is outstanding growth there year over year.
Drill down to give us a little bit more color as to what drove that.
Was it a lot of kind of onetime work or is it do you think thats more sustained more sustainable than you first.
First thought.
If it is more sustainable.
It would appear the Q3 guidance, maybe a tad conservative.
Can you comment on that.
Yes, Charlie it's Dave I'll comment on it so.
Yeah.
As you pointed out the <unk>.
Traditional compliance offerings saw really nice growth I noted.
In the prepared remarks that was really driven by higher customer counts market share gains and some price increases around the additional services.
That we provide there I think when you look at Q2, its the highest quarter for.
Compliance in both of the segments driven by proxy.
The work that goes around there.
Specific to Q3 guidance.
The year over year.
Really tough comp more on the transactional side.
Last year again, I mentioned this last year, we did $114 million of transactional.
In Q3.
As we look at what we've done so far in.
In the first two quarters. This year just over $50 million in Q1 transactional revenue about $74 million this quarter, we're assuming somewhere similar.
So the Q2 level.
That's really what.
What brings that Q3 guidance.
To where it is just the tougher year over year comp and the fact that that.
Transactional revenue or sorry, the compliance revenue that you noted.
Those are.
Sustainable and ongoing recurring.
But again that levels elevated in Q2 driven by proxy.
Yes.
Okay.
Add to that this is Craig.
We're at the center of our clients regulatory compliance and governance needs and I think the CMC on compliance results in.
In the quarter and demonstrate that and as you heard from Dan We're supporting clients in any way that they want to work.
And really our domain expertise our relationships in the capital market.
Driving this reoccurring revenue.
Our clients are viewing us as an extension of their team.
Whether that's in proxy.
Capital disclosure.
<unk> mandate.
As we reviewed on the call compliant up 31% as Dave said, it's driven primarily by 10-K and 10-Q volume.
So share gains in 10-K, a 27%.
As a result of public company growth and stock who are utilizing our traditional platform for our customer count is up 11% per 10-K's for proxies is up 27%.
So just a really nice performance there.
<unk> grew from 2021.
So with when the number of public companies working here is increase the retention on that business is high so it is going to be stable.
The year over year growth certainly in 2023 with given the correct.
Market.
But we are increasing our share of SEC compliance filings. After many years of declines we're going to.
Executing on our plan in 2022 and beyond.
We're in a really great competitive position.
On outperforming regardless of the market.
Sorry, Charlie Charlie I would just add this is Eric Johnson I would just add from the investment company's perspective.
What we're seeing is our clients really rely on the GIC team to help them manage their complaints process on a monthly weekly basis. So what we're seeing is the driver of revenue for US is our tech enabled solutions as well as our services teams.
Our teams manage the creation through the filing as well as the wind posting an E delivery of this compliance work. So that's been a big driver for us.
Thanks, a lot and thanks for all that color that's really helpful.
Shifting a little bit.
Capital market software side growth was about 5% year over year, but lower sequentially can you maybe expand a little bit more on that.
Yes.
So I'll kick off and then.
Excuse me, it's Dan if anyone wants to jump in but if you disaggregate that the.
It's really the mix impact of venue, whose primary use cases M&A.
So venue grew or was flat grew about 2% on a constant currency basis, and then what was extremely positive and continues to be was the performance in our compliance software within capital markets. So the new active disclosure subscriptions grew 25% year over year.
So really happy about the reception that thats receiving in the market and then also as we're converting clients over as I mentioned in my <unk>.
Comments were seeing good good price uplift and better longer term on the contracts.
Great. Thank you very much jump back in queue.
Thank you Kara.
Your next question comes from Pete Heckmann.
Your line is open.
Good morning, everyone really nice good morning, Pete.
Follow on to Charlie's question, just trying to dig in a little bit more on that.
The upside or the offset in compliance revenue really.
A pretty big number $76 million certainly bigger than any quarter, we've seen in the last three years.
I just wanted to it sounds as if youre doing perhaps more services around annual meetings are proxies.
Is that correct would it would it be more tech enabled services.
Or software and then.
Could you.
Given your guidance for the third quarter doesn't show a repeat of that is that is that largely going to be seasonal revenue confined to the second quarter.
Sure I can lead off.
So thanks for the question. It is primarily seasonal because you have a mix of the K proxy then you had one that few peak.
In essence made.
Timeframe with Q.
So there is some seasonality baked on that and then you are correct, we're providing software which will show up obviously in the <unk> numbers are Fabulous just we're just we're called as well as managed solutions, which under the side surround our traditional platform.
Around our proxy creative services, it's around ESG, it's around.
The.
Reports that we're providing for our clients.
From an ESG perspective.
Really excited by the fact sheet that we're producing all of Thats rolling into the traditional compliance role.
Is based on us retaining.
Our clients from the prior IPO spak market moving that into 2022, delivering increased client count increased share again, a high retention rate.
So as you look at the forward quarters that retention is going to be primarily a Q.
Until you get to 2023.
When we accept expect to retain it.
Certainly the growth of IPO is going to suppress the growth yet again in.
In 2023.
Okay, Okay, and then within investment company.
It doesn't appear.
Terribly material I guess, but.
A modest uptick.
In transactional revenue.
Flex.
<unk>.
Like Fund fund.
Proxy projects on the print side.
Yeah, Hey, Pete This is Eric Johnson and thanks for the question.
Certainly proxy activity.
Those transactional work like closed end funds that are transactional in nature. So should we had a nice mix in the quarter.
Okay.
Great I'll get back in the queue I appreciate it.
You bet.
Again, if you would like to ask a question press star and the number one on your telephone keypad.
Your next question comes from Charles Strausser.
Hi.
Couple of follow ups here.
Looking at the EBITDA margins.
So a meaningfully better than your guidance for Q2.
And again it is closer to what margin should look like in the back half of the year.
You should see some of the mix.
Remain more favorable than.
And perhaps the mid 'twenty that youre guiding to.
Yes, Charlie So I think.
Certainly for Q2.
A lot of that relative to our guidance was driven by.
A little bit better transactional revenue than our guidance implied.
So you see that both on the revenue line as well as the.
The margin line there.
And also as you know Q2 is typically our seasonally largest quarter.
So we get the operating leverage there.
And when you look at it.
At the mid 20 margin relative to what we did in Q1.
On similar size revenue I think we delivered 24% margin.
In Q1, and so when you take away the impact of the operating leverage on a similar sales mix.
We think mid <unk> is.
Is a pretty reasonable estimate.
Makes sense. Thank you and then just lastly, just any concern over the underperformance of companies. These facts recently.
Some of the pressures on some of these companies once they start trading under the new the new banner so to speak.
It seems to be waning.
Weighing heavily on the effect.
But just not only lumpiness Fayetteville, so finally combinations and getting them consummated.
Sure. This is Craig I'll take that.
Sac Ipos have historically made up a small percentage of our transactional revenue.
The bigger opportunity for us has been leasebacks.
And honestly in 2022 that they've held up better.
Given the year over year comparison.
It's also an opportunity for <unk> because in the dates back many that had been announced.
And there's over 100 that had been announced many through that are completed fewer completed but there tends to be the larger.
These facts, which trends towards deeper.
As you heard in the prepared remarks, our kind of sweet spot or these larger deal.
Larger more complicated working groups that have been on these things back from that.
We've really been able to increase our share.
In this space even year over year based on the mix of deals within that so very correct. It's back the initial filings.
Nonetheless.
600 stack looking for a target.
There still is an opportunity with that population as well as the 100 that have been announced where certainly closely monitoring the SEC back attention.
We support transparency and.
We think it's the.
It'll formalize sort of house back of play in the capital market.
Just kind of continue to be.
Be an opportunity to deepen as we support our clients.
Think the stack formations will reset to a less manic pace.
B above the long term average, which prior to 2020.
There was a lot of.
And all of that through their software platform. So it's just a nice ecosystem.
Great. Thank you for that.
Thank you.
Your next question comes from Raj Sharma.
And your line is open.
Thank you guys.
And an excellent quarter.
I wanted to understand so what seems to have caused the significant outperformance in Q2 as the transactions have done better.
Excellent business has done better than the overall industry I wanted to understand that were caused.
That.
Pete.
So the other big reason is better than expect expected compliance.
Related that you seem to be gaining share in.
Do you not expect that to continue in Q3 and Q4.
The share gain impact.
Because because the guidance seems very conservative relative to the outperformance <unk> seen in Q2.
Yes. Thank you thank you Raj.
A couple of things on your.
The first question on transactions. So it's a couple of things the overall market is.
Some of the stats that we quoted are are unit based and so we do see clients continuing to do work.
As and even though deals on a closing were still good.
Getting compensated recognizing some revenue for that work and importantly.
As I mentioned those statistics, our unit base, we find ourselves very well.
Positioned as we've always been and we've been we were very successful in.
Winning the more complex and the larger deals and so those for measuring share on units and then seeing the flow through coming dollars. So we saw some pick up there on the compliance side.
Last year's exceptionally strong IPO market.
And.
Yes, IPO market numbers and say, it's back market did lead to additional compliance ongoing work for us and we saw that come through in Q1, we saw that come through in Q2, and we expect that going forward. In addition in the second quarter.
We do benefit from the proxy season, which is a seasonal activity.
And we had some really good.
Performance there as well.
I think in terms of guidance and how that flows through I don't know, Dave if you want to add anything to your prior comments.
Yes, so when you look at Q.
Q3, again, the midpoint of our guidance for transactional assume something similar to the call. It mid 70 million number that we reported in Q2.
But again that year over year comparison is extremely passed last year's third quarter.
Transactional revenue was $114 million.
And again that was the highest quarter that we've seen for transactional.
In a quarter in the last five years.
I think probably on margin the most relevant point here. We noted this on the first quarter call and.
Reiterated it today.
And Thats, what our margin profile is much much stronger than the historical margins, we were delivering in quarters with similar overall and transactional revenue.
Raj I went through some of the comparisons in the prepared remarks.
The takeaway there is that the company is fundamentally more profitable regardless of the transactional environment now we will certainly see the impact of.
Changes in the transactional market, but I think when you think about the underlying baseline profitability.
It's really substantially higher than it was just a couple of years ago, and again thats due to the changing sales mix more software less per ads.
As well as the actions that we've taken on.
To permanently reduce the cost structure and all of that is getting reflected in the results.
Right. Thanks for that but the Q3 guidance still seems very conservative given.
Where you see.
Transactions as flat to second quarter, and then compliance do you not view.
There is a seasonality impact from Q2 in compliance the 10-K that you won't.
But you do not see the market share gains coming through in Q3 and Q4 as well.
No those gains.
<unk> will come through I think when you look at the to your point the seasonality aspect of.
Compliance and you can take take a look.
Last year as an example.
Clients last year went from $48 million in Q1 to 58 million in Q2 down to $28 million in Q3 and $21 million in Q4, so again.
Q1, with with 10-K Q2 with some some K, obviously, all the quarters have acute but that proxy volume. So the seasonality in compliance is just much much lighter in the back half of the year than it is in the front half of the year.
Got it got it okay.
The last question is on the print.
Okay.
Sorry, just one more thing.
We have.
And our.
On the investors site on the website are trending schedules that goes back quarterly to 2019, and so I think it would be helpful. You can see.
Really.
That seasonality plays out and it's pretty consistent in each of the last three years.
Great got it and then the print side or have most of the cuts been taken.
I think you indicated.
There also seems to be better than expected performance on the print side.
In Q2.
Yeah. So no no that's a great point so.
<unk>.
The first part.
The answer is yes more than more than half of the <unk> impact has been reflected in our year to date results, we think theres a little bit that happens in the back half of the year, but.
Generally absorbed.
The second point around being a little bit better.
Then than our initial guidance on the combination of the regulatory impact as well as.
Some of the contract pruning that we were doing we.
We changed that estimate for this year, we initially set about a $40 million revenue impact and essentially no EBITDA impact.
We've taken that down to about a $30 million impact and.
From a revenue perspective, and actually from from an EBITDA could actually be helpful and the reason for that change.
Is that a lot of the contracts that we thought we were exiting.
Through price increase and we thought that we would likely lose we've actually retained.
More of that work at substantially higher prices.
At a margin that is now acceptable on that work and therefore.
The total impact of print from a revenue perspective is less and we actually get.
Pretty reasonable margin on it now.
Great. Thank you.
I'll take my questions offline. Thank you congratulations again.
Thank you Raj Thanks Roger.
Your next question comes from Pete Heckmann.
Your line is open.
Hey, just two quick follow up so just to be clear on capital markets transactional revenue certainly.
That outperformed our expectations given.
Some of the activity, we saw but is it fair to say the two areas that outperformed or.
Or at least get that.
<unk> would be Emma.
M&A overall.
Including with venue and then Deepak mergers.
Yes Pete.
So we would agree I think even relative to the guidance.
We had assumed lower transactional revenue and again.
As we noted the overall M&A, including these back was.
Much more or much less impacted.
On a year over year basis than than IPO activity.
Okay. Okay I just wanted to make sure there wasn't some unusual kick up in some other item.
There and then my second question is just I.
The building number of public companies is good for <unk>, plus the fact EBIT dollars.
<unk> of those will be public companies is good for defense, but just looking at the share.
Of Ipos in the first half that was down fairly materially from from the normal run rate of like 35% to 40% of Ips are getting deferred is that primarily just because most of the ipos in the first half or either pretty small.
Or just it increased mixed it just backs or traditional ipos.
Yes, correct.
This correctly, so Q2 slowest.
IPO quarter since 2009, and most of what you saw which you just referenced micro caps accounted for the majority of all ipos in the quarter. There were only six ipos raised more than $100 million.
The largest with Bosch alarm.
77% of the Ipos in Q2 under $36 million in.
43% of these before and insurers.
In other markets that would be a fundraise.
Not where we play in that really down market.
In the first half of the year.
Then 11, ipos greater than $100 million and we have completed eight of them.
So we're really pleased with our share I think when you look underneath.
The work that's happening, Dave and Dan both mentioned the Ipos that are active.
Companies that are publicly announced their intent to price in Q3.
Which include players kind of care specialty building products and find way you.
We have others that have announced their intent to price this year.
The current read it and click.
I look underneath that and I think we're doing really well.
Within these several hundred that continue to work so absolutely our share.
Looks like it's taken a hit but it's really the market within that and I think what we see and hear from our clients.
Is some optimism that history has shown and demonstrated that the.
The change in the capital market can happen really quickly we've seen it on the downside right now.
Waiting for that to normalize.
Hopeful that IPO window opens.
Great Alright, Thats, great color I appreciate it Greg.
Welcome.
There are no further questions at this time, Mr. Dan Lee I turn the call back over to you.
Thank you Joseph and thanks, everyone for joining us today, we appreciate the interest and the ongoing support and we will look forward to our next earnings call in November . Thank you.
This concludes today's conference call you may now disconnect.
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