Donnelley Financial Solutions Inc. Q1 2023 Earnings Call
Investors section of our website at decent solutions Dot com.
During this call we'll refer to forward looking statements that are subject to risks and uncertainties.
For a complete discussion please refer to the cautionary statements included in our earnings release.
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 certain non-GAAP financial information such as adjusted EBITDA, adjusted EBITDA margin and organic net sales change.
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 GAAP to non-GAAP financial information.
I am joined this morning by Dan Leib, Dave Gardella, Craig Clay, Eric Johnson, Floyd stimuli and Kevin Turner.
I will now turn the call over to Dan.
Thank you, Mike and good morning, everyone.
We delivered strong consolidated first quarter results given the economic backdrop with net sales of $198 $6 million non-GAAP adjusted EBITDA of $42 4 million and non-GAAP adjusted EBITDA margin of 21, 3%.
Our first quarter performance again delivered a higher level of profitability compared to historical quarters with similar overall and transactional revenues. Another proof point that the execution of our strategy has resulted in defend becoming more durable and structurally resilient as we continue to invest.
Shifting toward a more favorable recurring sales mix.
While continuing to aggressively manage our cost structure and being disciplined stewards of capital.
As I mentioned, our first quarter performance was in the context of a very challenging operating environment as capital markets transactional activity continued to be severely impacted by the combination of macroeconomic headwinds and market volatility for context, the level of IPO transactions during the first quarter.
Remained at record low levels.
Down approximately 95% from the peak reached in the first quarter of 2021, while M&A activity also remained far below historical levels combined these headwinds resulted in the lowest level of quarterly capital markets transactional revenue since our company's inception in 2016.
A level, which is down approximately 20% from the first quarter of 2022 and down approximately 55% from the first quarter of 2021.
I am pleased that during the prolonged downturn in capital markets transactional activity, our business has proven to be resilient and substantially more profitable specifically, our first quarter 2023, adjusted EBITDA margin of 21, 3% is 11 100 basis points and 770.
<unk> points higher than the first quarters of 2019, and 2020, respectively, both of which had higher levels of both overall sales and transactional sales.
Our performance reflects our evolving sales mix permanent changes to our cost structure and continued cost discipline and further demonstrates our ability to sustainably operate at a higher level of profitability across a range of market conditions, Dave will cover the first quarter results in more detail shortly.
A key factor behind our margin performance has been the progress we have made towards creating a cost structure and operating model that better aligns with our business mix part of which is driven by cyclical market factors over the last several years to establish an optimized and variable cost structure in areas of the business that have both seasonal.
And cyclical fluctuations, we took aggressive cost actions targeted many aspects of our fixed cost base with focus on downsizing, our print production platform driving internal efficiencies and reducing our physical footprint.
During the first quarter, we took additional cost reduction actions to better align our cost structure with our current level of sales part of which are subject to the uncertain outlook for capital markets transactions. These measures in combination with our previous cost reduction efforts permanently reduce fixed costs simplify our operations.
And further improve deepens resiliency across various market conditions as.
As we continue to gain efficiencies across our operations. We also remain focused on reinvesting in areas of our business to accelerate our transformation into a digital first company.
In the first quarter consistent with our plan, we made incremental investments in both our software offerings and associated business processes to support continued modernization innovation and growth.
These investments reflected in both operating expense and capital expenditures will help to profitably scale existing products increase our velocity to market and enhanced client experience.
As we have discussed in the past, we are creating a unified compliance platform and ecosystem that benefits deepens compliance solutions for corporations mutual funds exchange traded funds and regulated insurance companies spin.
Specifically, our platform integrates capabilities across our market, leading regulatory and compliance software solutions active disclosure and <unk> suite to combine foundational capabilities across composition tagging filing and regulatory and financial reporting into a single solution.
While maintaining client segment unique capabilities.
This platform in conjunction with our deep domain service expertise allows us to address clients' evolving regulatory and compliance needs under current and future regulations are.
<unk> have enabled us to increase development velocity and efficiency with the most modern technology and security protocols employed.
Specific to our first quarter performance I am encouraged with the positive momentum in our software offerings, where we delivered year over year net sales growth of nearly 4% on an organic basis. Despite a slight decline in our largest software offering venue software solutions net sales represented 35, 3%.
Total net sales in the first quarter, an increase of approximately 220 basis points from last year software sales mix on a trailing four quarter basis software solutions net sales made up approximately 34% of total net sales an increase of approximately 500 basis points from the first quarter 2020.
<unk> trailing four quarter period.
This continued positive mix shift toward recurring offerings is a reflection of our progress in transforming defend and positions us well to achieve our long term target of driving 55% to 60% of total net sales from software solutions by 2026.
A major driver of the first quarter software growth was the performance of our recurring compliance and regulatory driven software products, which include active disclosure in arc suite net.
Net sales for these recurring compliance software offerings grew approximately 5% on an organic basis versus the first quarter of last year and accounted for nearly 65% of total first quarter software solutions net sales the.
The growth in our recurring compliance software offerings is led by Ark suite, which delivered first quarter net sales growth of six 4% growth on an organic basis in the first quarter arc suite net sales reached $26 $4 million, which was a quarterly record driven by continued client adoption. In addition.
I am encouraged by the solid growth in subscription revenue during the first quarter. Our suites net sales growth was below historical levels. As a result of a more normalized demand for our digital our total compliance management solution. Following its initial adoption, which benefited growth in 2021 and part of 2022.
Yeah.
In addition, a shift in the implementation timeline of certain funds coming onto the Ark suite platform delayed the realization of a portion of revenue in the first quarter with.
With a robust implementation pipeline combined with overlapping of the ramp up of total compliance management, we expect higher growth in the quarters ahead.
Sweet possesses the characteristics of a best in class enterprise software offering with a high component of recurring subscription revenue, which makes up nearly 90% of total revenue as well as long term contracts with average contract lengths and <unk>.
Or three years.
As an end to end software solution for investment company financial and regulatory reporting our suite is well positioned to capture additional demand from current use cases as well as from new regulations, such as tailored shareholder reports.
Net sales for active disclosure our purpose built solution for SEC reporting grew approximately 6% in the first quarter. While active disclosure is recurring subscription revenue grew approximately 5% as expected the recurring.
Prescription revenue growth for active disclosure was depressed in the first quarter as we finalize the transition of the remaining customers from 83 to <unk> we.
We remain on track to decommission legacy 83 in the second quarter, which will allow us to shed the duplicative costs associated with operating two platforms, we expect stronger growth levels returning in the second half of 2023.
Turning to our transactional driven software venue.
<unk> with what we saw throughout 2022 within the context of a very weak capital markets transactional environment venue continued to perform significantly better than its primary use case M&A.
With the global M&A market down nearly 30% year over year in the first quarter venue net sales were down less than 1%. We are encouraged by the level of underlying activity taking place on our virtual data room platform, which is a reflection of strong sales execution.
Before turning the call over to Dave Let me provide an update on the dynamic regulatory landscape as highlighted previously we are in the midst of a very active period of FCC rulemaking that impacts many aspects of regulatory compliance, including disclosures filing and the expansion of <unk> tagging on last quarter's call.
We mentioned three regulatory changes stellar shareholder reports financial data Transparency Act and the pay versus performance disclosure, let me touch on each one in more detail and discuss our deeply and assist our clients to comply with these regulations.
First regulatory change I'd like to highlight which is already effective as the pay versus performance disclosure.
SEC rule, which was adopted in September of last year with an effective date of December of 2022 requires public companies to disclose annually the relationship between executive compensation actually paid to the company's named executive officers and the company's financial performance with 2023 marketing year one of this new.
Rule Eastman has been actively assisting our clients during this year's proxy cycle with our industry, leading regulatory solutions to help them comply with this mandate.
Versus performance is an example of a regulation that requires additional disclosures and advice and service from deepen but is not a material change to client compliance requirements as such we expect the value from this rule to be primarily from additional disclosure and associated data tagging.
We saw some benefits from this regulation in the first quarter and expect additional benefits in the second quarter, which is the peak for proxies.
As the pay for versus performance disclosure is an annual requirement, we expect to see recurring revenue benefit in the years going forward.
A much larger regulatory changes tailored shareholder reports a comprehensive rule that has brought impacts on the regulatory and compliance requirements for mutual funds and exchange traded funds tailored shareholder reports. So the compliance date of July 2024. The rule is defined by three main elements.
First is the disclosure at a share class level versus strong level with multiple share classes per fund on average the industry as a whole is expected to produce significantly more documents on an annual basis. Next this rule introduces IX BRL tagging for the first time the investment company industry will be required to tag shareholder report.
And I experience twice per year, which reinforces the SEC's trend towards structured data finally tailored shareholder reports expands compliance requirements, including layered disclosure web hosting and Ada compliance all of these changes will be supplemented by updated distribution requirements, including <unk>.
<unk> and print, which presents significant operational changes to the industry being the only true end to end provider of regulatory and compliance solutions for investment companies offering financial close stylized documents <unk> tagging assembly and filing and distribution of regulatory filings.
<unk> is uniquely positioned to leverage our technology leadership service expertise and production capabilities to help our clients successfully operationalize a straight through process for the requirements under tailored shareholder reports.
Furthermore, by leveraging our investments in platform services across season, we are well positioned to service our investment company clients, providing thought leadership and guidance to educate our clients and ensure compliance with confidence I am pleased with the progress we have made in our tailored shareholder report solution thus far.
The final regulation that has the potential to profoundly impact of regulatory and compliance landscape is the financial data Transparency Act.
Installation for more than a decade deepen as actively supported the Cta legislation, which was signed into law in December 2022.
The legislation mandates that eight major U S financial regulatory and supervisory agencies, including the SEC Federal reserve and the FDIC create uniform data standards for the data they collect from regulated entities.
Cta impacts every organization involved in preparing providing and using financial data, including financial institutions agencies and technology contractors, while implementation plans for FTA over the last several years deepening is proud to be a leader at preparing the impacted stakeholders for Cta readiness.
Earlier in April <unk> was the title sponsor of the data foundations Reg Tech 2023 data summit, where decent experts along with representatives from the data foundation and the SEC explore data modernization under the FDA.
A key takeaway from the discussions was the successful implementation of that DTA will rely on innovative regulatory technology to ease the burden of compliance.
Our compliance software capabilities, coupled with deep domain and service expertise positioned <unk> well to help clients access understand and utilize data to meet regulatory compliance requirements and the adoption and operationalization of DTA.
In addition, the SEC is expected to issue new rules requiring companies to disclose certain climate related information.
Ranging from greenhouse gas emissions to expected climate risks yesterday, we issued a press release announcing deepen and Salesforce are working together to operate best in class end to end solution, enabling clients to capture and track ESG data and Salesforce is net zero cloud before seamless.
<unk> reporting that data to the SEC.
Using active disclosure deepens financial reporting solution.
In addition, with the help of Accenture, we are implementing net zero cloud to track the carbon footprint of our global operations.
<unk> carbon data is now integrated into active disclosure, where does automatically routed through guided workflows sign offs tasks and style content libraries to be ready for filing to meet SEC requirements, our collaboration with Salesforce and Accenture is another example of how deepened clients can work.
<unk> faster smarter and more securely to meet financial reporting requirements and regulatory mandates. These.
These recent examples of regulatory changes highlight deepens market opportunity and compliant solutions leveraging our end to end solutions to drive increased adoption of software solutions as well as higher consumption of tech enabled services across our capital markets and investment companies businesses.
<unk> provides our clients with the best guidance and solutions to help navigate the ever changing compliance environment for current and new SEC regulations. Each of these new regulations will leverage our single compliance platform, coupled with client segment unique capabilities given.
Given the implementation dates of these regulations, specifically tailored shareholder reports Nf DTA that span into next year and beyond we expect to see revenue benefits starting in 2024 with more substantial benefits in 2025 onward.
Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our first quarter results and our outlook for the second quarter Dave.
Thank you Dan and good morning, everyone.
Before I discuss our first quarter financial performance I'd like to recap a few housekeeping items, which impacted our year over year comparability in the quarter.
First as noted in our earnings release during the first quarter, we sold our investment in media.
<unk> received proceeds of $11 $8 million from the sale, including $8 $9 million of cash and common stock of the acquirer.
It resulted in a pretax gain of $6 $7 million, which is recorded within corporate on the investment and other income line of our income statement.
Second as discussed on last quarter's earnings call. We completed the disposition of our Edgar online software offering in the fourth quarter of 2022 for.
For the full year 2023.
The disposition negatively impacts the year over year total net sales comparison by approximately $5 million with the vast majority of the impact affecting the first three quarters of this year.
The impact on our gross profit and non-GAAP adjusted EBITDA comparisons is de Minimis.
For purposes of segment level year over year net sales changed discussions I will refer to the organic net sales change, which adjust for the impacts of the Edgar online disposition as well as changes in foreign exchange rates.
A reconciliation of reported to organic net sales change is included in our earnings release.
Finally, certain technology expenses that were included in cost of sales in 2022 are recorded within SG&A in 2023.
As a result compared to the first quarter of 2022.
There was a $2 6 million dollar reduction.
The cost of sales.
And a corresponding $2 $6 million increase in SG&A with no impact to the year over year comparability in non-GAAP adjusted EBITDA for consolidated net earnings.
This change positively impact year over year gross margin comparability by approximately 130 basis points and negatively impacted non-GAAP SG&A as a percentage of sales by approximately 130 basis points.
We expect a similarly sized dollar comparability impact on cost of sales and SG&A for each of the three remaining quarters of 2023.
Now turning to our first quarter results.
As Dan noted, we delivered strong results in the quarter. Despite the prolonged downturn in the capital markets transactional environment that continues to negatively impact our transactional driven offerings.
The volume of capital market's deal activity remained substantially below last year's levels as the market softness we experienced throughout 2022 continued into the first quarter of 2023.
Given the weak demand environment for corporate transactions consistent with our historical approach of aggressively managing our cost structure. We took additional cost reduction actions in the first quarter. While at the same time continue to invest in initiatives that accelerate our transformation.
Our first quarter operating results included approximately $5 million of incremental investments related to these initiatives with approximately $4 million and additional product and technology investments to accelerate the development of our software solutions and the remaining $1 million aimed at.
Toward the modernization of certain business processes in order to improve operating efficiencies in total these additional costs impacted our first quarter adjusted EBITDA margin by approximately 250 basis points.
As mentioned previously these incremental investments, which we expect to continue for the rest of 2023 as part of our investment plan do not represent a permanent increase to our cost structure, we expect to realize the benefits of these initiatives beginning late this year.
Consolidated basis total net sales for the first quarter of 2023 were $198 6 million.
A decrease of $12 4 million or five 9% on a reported basis and four 4% on an organic basis from the first quarter of 2022.
Given the very weak transactional environment substantially all of the year over year net sales decline took place in the capital markets transactional business, which was down $10 $4 million or 22% versus the first quarter of last year.
First quarter non-GAAP gross margin was 54, 5% approximately 140 basis points higher than the first quarter of 2022, primarily driven by the impact of cost savings initiatives price benefits and the impact of changes between cost of sales and SG&A.
That I, just mentioned, partially offset by lower capital markets transactional activity.
Adjusted non-GAAP SG&A expense in the quarter was $66 $3 million or $5 $3 million increase from the first quarter of 2022.
As a percentage of net sales adjusted non-GAAP SG&A was 33, 4% an increase of approximately 450 basis points from the first quarter of 2022.
The increase in adjusted non-GAAP SG&A is primarily driven by the impact of changes between cost of sales and SG&A.
Incremental transformation related investments and higher bad debt expense, partially offset by a reduction in selling expenses as a result of lower sales volume and the impact of cost control initiatives.
Our first quarter adjusted EBITDA was $42 $4 million, a decrease of $8 7 million or 17% from the first quarter of 2022.
First quarter adjusted EBITDA margin was 21, 3%.
Decrease of approximately 290 basis points from the first quarter of 2022, primarily driven by lower capital markets transactional sales and incremental investments in support of our strategic transformation, partially offset by the impact of cost control initiatives price uplifts and lower selling.
As a result of lower sales volume.
Turning now to our first quarter segment results net sales in our capital markets software solutions segment were $43 $7 million.
An increase of two 3% on an organic basis from the first quarter of last year.
The net sales growth in this segment was led by our recurring compliance product active disclosure, which grew approximately 6% in the quarter with recurring subscription revenue growth.
Of approximately 5%.
As Dan commented earlier, we are nearing the end of our client transition from 83 to new a D. A process for which we expected and realized a temporarily elevated customer churn rate.
And bind with the impact of spec liquidations normal customer churn and the ongoing weakness in IPO activity, we saw a modest decline in the number of customers on the platform during the quarter.
The reduction in customer count, which resulted in a slowdown in subscription revenue growth was more than offset by price increases on conversions, new customer wins and increase in service revenue.
We expect the slower active disclosure subscription revenue growth to continue in the second quarter and then improve in the second half of the year as we complete the platform transition by the end of the second quarter.
Net sales of our virtual data room, offering venue were down zero point $2 million or 0.9% compared to the first quarter of last year. Despite a steep decline in M&A volume.
Similar to what we experienced throughout 2022 venue performed better than the market trend of its primary use case M&A during the first quarter.
With the global M&A market down nearly 30% on a year over year basis in the first quarter, we continue to be encouraged by the resiliency of venue sales.
Adjusted EBITDA margin for the segment was 16, 9% a decrease of approximately 550 basis points from the first quarter of 2022, primarily due to an unfavorable sales mix and increased allocation of overhead costs and incremental investments in technology development.
Partially offset by price uplift from new <unk>.
And cost control initiatives.
Net sales in our capital markets compliance <unk> Communications management segment were $94 1 million a decrease of eight 4% on an organic basis from the first quarter of 2022, driven by lower capital markets transactional activity, partially offset by a modest <unk>.
Year over year.
Growth in compliance revenue as a result of event driven compliance volume in the quarter and favorable timing chips.
And a continuation of the prolonged downturn in capital markets transactional environment.
Demand for F&B transactions remained very low in the first quarter as the quarter progressed turmoil throughout the financial sector further escalated market volatility.
Combined with the impact of persistent macroeconomic headwinds elevated interest rate.
And geopolitical uncertainty first quarter capital markets transactional sales were lower both on a sequential as well as a year over year basis.
In particular, the IPO market remained very sluggish during the first quarter with only eight priced ipos over $100 million, taking place on U S exchanges compared to over 50 priced ipos in the first quarter of 2022.
The M&A market, while more resilient than the IPO market.
Sequentially from the fourth quarter of 2022 and was down nearly 30% versus last year's first quarter.
The decline in capital markets transactional revenue is partially offset by our capital markets compliance offering which grew approximately 2% year over year, driven largely by an event driven compliance projects and favorable timing shifts relative to last year's <unk>.
First quarter.
As a reminder, capital markets compliance sales are seasonal with first and second quarter generating the highest levels of.
Sales during the year, driven by the peak and 10-K and proxy filings during those periods.
<unk>, while our capital markets compliance offering which supports our corporate clients with their ongoing compliance needs.
Is mostly recurring in nature. There is a moderate component of event driven revenue from filings such as transactional 8-K's, and special proxies, which are nonrecurring and can fluctuate from period to period.
Further the recent trend of increased spec liquidations creates a headwind on the number of public companies and the associated demand for compliant services.
Adjusted EBITDA margin for the segment was 28, 6% a decrease of approximately 100 basis points from the first quarter of 2022.
The decrease in adjusted EBITDA margin was primarily due to lower transactional sales, partially offset by cost control initiatives.
Sure.
<unk> costs.
Lower selling expenses as a result of lower sales volume.
Net sales in our investment companies software solutions segment were $26 $4 million, an increase of six 4% on an organic basis versus the first quarter of 2022, largely driven by growth in subscriptions.
As we've highlighted in the past Ark suite net sales growth benefited from the adoption of art digital our total compliance management offering which was introduced in 2021 in response to regulatory change we.
We saw strong adoption of total compliance management throughout 2021 and into the first quarter of 2022, which impacted the year over year growth in the first quarter of 2023.
With demand more normalized following the onetime adoption, we expect a more modest growth related to this offering going forward.
Based on Dan's earlier comments, we are optimistic about the opportunities created by regulations, such as tailored shareholder reports and believe arc suite is well positioned to capture additional demand from new regulations to further accelerate our recurring software revenue growth.
Adjusted EBITDA margin for the segment was 31, 1% a decrease of approximately 560 basis points from the first quarter of 2020 to.
The decrease in adjusted EBITDA margin was primarily due to higher product development and technology investments in support of growth opportunities such as tailored shareholder reports.
And increased overhead costs, partially offset.
By cost savings initiatives and favorable price impacts.
Net sales in our investment companies compliance <unk> Communications management segment were $34 4 million a decrease of eight 5% from the first quarter of 2022, driven primarily by the exit of low margin work, partially offset by higher service fees and <unk>.
Price uplifts.
Adjusted EBITDA margin for the segment was 27, 3% approximately 180 basis points higher than the first quarter of 2020 to the.
The increase in adjusted EBITDA margin was primarily due to a favorable sales mix featuring more services and less print the impact of cost savings initiatives and price uplifts, partially offset by higher overhead costs.
non-GAAP unallocated corporate expenses were $9 $5 million in the quarter, an increase of $1 $1 million from the first quarter of 2022, primarily driven by an increase in expenses aimed at accelerating our transformation, partially offset by the impact of <unk>.
<unk> cost control initiatives.
Free cash flow in the quarter was negative $62 $1 million flat to the first quarter of 2022 as the decline in adjusted EBITDA unfavorable working capital changes and higher interest payments were offset by lower incentive based and sales commission payments made in the.
First quarter of this year versus payments made in the first quarter of 2022 related to our 2021 performance.
We ended the quarter with $234 $8 million of total debt and $206 million of non-GAAP net debt, including $110 $5 million drawn on our revolver.
From a liquidity perspective, we had access to the remaining $189 $5 million of our revolver as well as $28 $8 million of cash on hand.
As of March 31, 2023, our non-GAAP net leverage ratio was 1.0 times.
As a reminder, our cash flow is historically seasonal we are 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 sales, we expect the seasonality to continue to become less significant.
Regarding capital deployment, we repurchased approximately 34000 shares of common stock during the quarter for $1 3 million at an average price of $38 82 per share.
As of March 31, 2023, we had $123 million remaining on our $150 million stock repurchase authorization.
Given the current high interest rate environment, and our floating rate debt, we assigned a higher priority debt management, which was which resulted in lower share repurchases.
Going forward, we will continue to take a balanced approach towards capital deployment.
We continue to view organic investments to drive our transformation share repurchases and net debt reduction each as key components of our capital deployment strategy and we will remain disciplined in this area.
As it relates to our outlook for the second quarter of 2023, while we expect the overall macroeconomic environment to remain challenging we are encouraged with a modest pickup in the transactional activity so far in the second quarter.
Through April price IPO showed slight improvement from the first quarter.
Large M&A transactions, while still below last year's level improved sequentially as well.
While we are encouraged by the pickup in activity to start the quarter, we remain cautious as the pace of transactional activity can change very quickly.
In addition, consistent with our priorities for 2023, we will continue to execute our investment plan in the second quarter with additional operating expenses directed towards accelerating our transformation.
We expect a similar level of incremental investment during the second quarter compared to the level from the first quarter.
With that as the backdrop, we expect consolidated second quarter sales in the range of $220 million to $240 million.
And non-GAAP adjusted EBITDA margin in the mid 20% range.
<unk> to the second quarter last year, the midpoint of our revenue guidance $230 million implies a year over year net sales decline of approximately 14%.
Primarily as a result of lower transactional activity.
From a margin perspective, our guidance of mid 20% range contemplates a lower level of transactional revenue compared to the second quarter of 2022 as well as the incremental investments, which I described earlier.
We expect our second quarter non-GAAP adjusted EBITDA margin to be once again much stronger than historical quarters.
Lifesize total and transactional sales.
Let me also provide a bit more color on our assumptions for capital markets compliance and communications management segment.
At the midpoint of our sales range, we assume a modest increase in second quarter transactional sales compared to the level. We reported in the first quarter this year reflected reflecting the higher level.
Activity, we've experienced so far this quarter.
As it relates to compliance based sales within the segment in line with normal seasonality, we expect the second quarter to be the largest sales quarter of the year.
We also expect second quarter compliance sales to decline modestly compared to a very strong second quarter of 2022.
Second quarter 2023 compliance sales will be impacted by the combination of certain compliance volume shifting from the second quarter into the first quarter as well as the decline in compliance revenue from specs, which benefited the second quarter of 2022 and many of those entities have since liquid.
David.
These declines are expected to be partially offset by strong proxy activity part of which is driven by the new pay versus performance disclosure.
With that I'll pass it back to Dan.
Thanks, Dave our strong performance in the first quarter was the result of the disciplined execution of our strategy and again demonstrated.
<unk> ability to perform well in challenging market conditions, while it is difficult to predict the end to the current softness in the capital markets transactional environment, our solid financial profile provides us with the foundation to continue to execute our strategic transformation.
Our focus remains on accelerating our business mix shift by continuing to grow our recurring SaaS revenue base.
While maintaining share in our core traditional businesses.
We will continue to invest in our compliance software platform to capitalize on regulatory tailwind.
In addition, we will continue to aggressively manage our costs and drive operational efficiencies, while maintaining our historical discipline in the allocation of capital before.
Before we open it up for Q&A I'd like to thank the <unk> employees around the world who have been working tirelessly to ensure our clients continue to receive the highest quality solutions 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.
And your first question comes from the line of Charles Strausser, which C. J S Securities. Your line is open.
Hi, good morning.
The better than expected results in Q1.
Talk about.
Maybe give us a little bit more color on what some of those <unk>.
<unk> already through those.
Pretty strong headwinds.
Yes, Charlie Thanks for the question. This is Dave I think when we.
We looked at.
That's what our guidance contemplated for for Q1.
As we mentioned on the last call the quarter started out slow.
We did see a better month of March.
Specifically in transactional revenue and as we noted.
On the on the prepared remarks that so far in Q2.
We're seeing seeing a relatively.
Stronger transactional environment then.
The first two months of the year certainly in the Grand scheme of things the market is still soft but.
I think signs of life in the transactional market.
Certainly helped Q1 as we said we're expecting a modest increase in transactional revenue in the second quarter relative to.
What we had in the first quarter here.
<unk>.
As we've said in the past hard to predict exactly how that's going to play out but certainly seeing.
Seeing some positive signs there.
Great. Thank you and then it's done.
Picking up on that the Q2 guidance just a.
A little bit more on what you are implying behind the assumptions in your guidance there.
Yes again.
I'm sorry.
Charlie I'll comment on a couple of pieces and then if you want to follow up.
With another question Thats great.
So as I mentioned modest increase in transactional relative to Q1, I think when we look at.
We talked about some of the things impacting the traditional compliance revenue.
Within capital markets.
We had some timing shifts this quarter.
And with with some of the.
<unk> liquidating on a year over year basis.
We're going to have a modest or expecting a modest decline in Q2 here.
I think when you look at some of the software offerings right we talked about.
Active disclosure and the increased customer churn in the first half of the year as we shut down 83 and <unk>.
Yeah.
But by the by the end of the second quarter.
And we will be.
Have the clients.
Uh huh.
All the clients left will be on the new platform.
And so we would expect that going forward in the back half of the year that will start to see a.
Pickup in active disclosure and then pretty similar story when you look at arc, we are overlapping some tougher comps in the first part of the year with.
The adoption of total compliance management throughout 'twenty, one into 'twenty, two and we would expect.
That growth rate on the software to start to pick up in the in the back half of the year.
Great that's very helpful and just maybe.
Until any question, but just thoughts on the full year.
No.
And specifically on free cash flow what your expectations are there.
Increase the spend on.
The transformation.
Yes, we havent given full year guidance and I think.
For us.
As you know the biggest variable will end up being what the transactional volume looks like and so we're reluctant to.
To give a full year number just because that can have.
Pretty significant swings like I said I think we're encouraged by.
What we've seen in the last two months here.
Kind of trending the right direction.
You know that said we've also.
You know I I think it's taken a prudent approach on the top structure you know we talked about the past actions. We've taken here again in Q1, and you know those will impact the rest of the year from a transformation perspective, we set about 5 million bucks in the quarter and those are <unk>.
<unk> not permanent cost, we would expect to start to see some benefits and that cost tail off in the in the the last part of the year.
Great. Thank you very much.
Thank you you're welcome.
And your next question comes from the line of Peter Heckman for da Davidson. Your line is open.
Hi, This is Brett Thompson on for Pete I, just had a quick question following up on that tailored shareholder reports opportunity can you better quantify the potential benefits fit.
For the investment management segment Alright.
Alright.
And thank you for some color on the new regulations would be in the ballpark. The estimated 10 million to 30 million dollar range of opportunity on a four year basis.
Yeah. So let let me kick off and then I'll I'll see if Eric wants to add anything.
So the regulations have been put out we're really excited as we mentioned the great fit for our platform from software to service.
I'll put.
That said we are in initial discussions with clients.
And you know the move from a fun level to.
Two a share class level really increases the number of units.
That this will be applicable for so we'd be looking towards later in the year likely are November call. When we would do a greater quantification and just to remind you that the regulation kicks in mid 2024 for.
For compliance so.
Many will will adopt earlier and be ready to go and all will be ready to go in the first half of 2004, so we'd expect roughly a half year, maybe a little bit more of impact in 24, and then full impact in 25.
Relative to take care hold reports and Eric I don't know if there's anything you want to add.
Yeah sure. Thanks, Dan Yep Bret in addition to what Dan had described around with one level.
Moving to share quests level reporting.
See and talking with some of her clients the impact will be three to five times. The number of reports they were produced today.
Uhm.
You're from a finally perspective.
In addition to the <unk> that the file today.
The bigger change and all this is the filing requirements are gonna expand to.
To include <unk> for each T. S are so <unk> meeting Hoover.
Overall, much more Edgar complexity and significant finally sizes due to the sheer class level disclosure.
<unk>.
And as Dan mentioned in his opening remarks.
Downstream impacts are significant as well, we're talking about linking and learning later disclosure as damned referred to earlier these requirements required linking to share class level reports to the base reports and also there's webhosting and a D. A complaint as well as distribution requirements. So there's there's significant change in the workflow signy.
If you could change in the industry you know I think the takeaway for US is it's important to note that.
Well this is new for our financial reporting clients.
Decent provides all these requirements today, so there's nothing really new from a decent perspective.
You were bringing our domain expertise and experience together to help our clients meet the complex regulatory reporting requirements for couch or reports and will be going through that process. All years were bringing your clients on board.
Damn pack to Ya.
Thank you.
And the cabinet anything <unk>.
Sorry.
I need any further.
Further questions there.
Mmm no great. Thank you for answering Michael Okay. Thank you yeah. Thank you.
And again, if you would like to ask a question Press Star then the number one on your telephone keypad and your next question comes from Ross Sharma would be Riley. Your line is open.
Hi, Thank you for taking my question.
Good morning, So I'm wondering if the kind of dealt with a little bit into the software side of so specifically to begin with the venue says what is really driving venue sales is it purely market share gains is it.
And also also how does the product structured can you can you remind us is at 100 per cent of SaaS product or is it a purchase for a period of time for transaction and then turned off.
How should we think venue if.
You know tough.
Tough transactions environment persist or if it if it improves.
Yeah, sorry.
Sorry.
<unk> no no no no I get the gist of it. So let me start and then Craig can can jump in as well and and Davis, if if you'd like.
Our product is more a line to the M&A market and so it does tend to have more volatility in it we do find clients will use it for a transaction and then keep it you know.
Longer to archive.
Archive pages and or to do work for acquisition integration et cetera, but if you look at the level of sales growth that venue has had and you go back to you know really strong years in transactions will go back to 2021 wherever venue grew at close to 46.
Per cent for the full year that was obviously in the face of fantastic transactions market. If you go to 2022, where transactions were down roughly 40% venue was down 6%.
So we would view that as pretty.
Pretty big outperformance given the main use case.
Similarly in this quarter venue was down just under 1% in the trans market or our transactional sales. The market was was down more but our transactional sales were down about 20 per cent.
And and so we would view that again as outperformance I made some attribution to really strong sales execution. The product itself is is a very good product and <unk>.
We've been successful in selling it into the marketplace.
And so Craig I'll I'll, let you weigh in as well.
Yeah at the end of build on that.
We are encouraged by the underlying activity that's taking place on the platform to support primarily M&A activities, but we're also pivoting in the subscription sale. We have a number of vehicles that were supporting from life Sciences to franchise.
We're also hearing from our dealmakers.
In this environment, they're finding growth opportunities.
Spike the volatility there's value adjustments that are driving that there's high demand for quality assets at a lot of cash on the sideline that's being looked at to put to work. So as we look ahead or venue pipelines with good <unk> driven by some sales execution as well as product.
Uhm. So in April we released venues multiply file redaction technology. So it's things like that that set the benchmark for the DDR industry. Our clients are able to redact across all their folder structures or file structure in the entire room, which is incredible to be able to read that anytime from.
Terms images.
Regions of the document and we're the only provider that's doing that so we're bringing these solutions, helping our clients. We're also winning awards.
Awards through leading security So last week, we announced that we had one act of disclosure award as well as our venue virtual data room from global Info SEC. So it is a great opportunity we're honored to be recognized as a security leader most important thing in a V D.
<unk> is sharing these documents broadly and having the security to demonstrate that so these awards validate our efforts as a trusted partner for financial services.
So we're seeing great adoption, we're executing on the plan to win in any market.
As Dan said higher markets, we're going to win more we're really happy with what's happening today and we are uniquely positioned on a D. L. Team is M&A work continues that we're gonna drive software throw a any virtual data room.
So it sounds like you have a fantastic product Dean going forward would you expect more market share gains on venue or with the growth.
The movement and revenues be more in line with what the transactions market does I mean, I'm sure there's gonna be some <unk>, but how do we sort of view that moving forward there more to be had more market share games do we had.
Yeah, I think as we continue to execute we're gonna have incremental gains uhm in any market right. So it'll be hard to disaggregate that as the market shifts very quickly, but we are executing were executing daily we're going against our competitors were winning will continue to execute that through every.
Market and we're excited about the ability to win no matter what.
Great and then if if we can.
Move on to the next will be the active disclosure how should we think of ongoing growth. There do we and did I hear that the transition is almost done from the legacy 283 is that gonna be done in the second quarter is that the quarter we are in.
And and so then that our new product extensions enhancements.
Or is there more to be gained here in terms of market share.
Yeah. So I'll just kind of summarize what you heard from Dan and Dave We picked up slightly in Q1 from two four.
But we've had a number of headwinds so we've had elevated churn due to the 83 decommissioning.
We're almost through that and that will complete it in this quarter.
So we're nearing the end of that transition uhm. So some of the remaining clients are not going to make that journey. Just like we saw in 2022 in Q1 due to price or do to fit so another positive trend underneath that is what we saw with the competitive turn on.
New active disclosure so given his maturity.
Capabilities perspective that trend should continue.
Into 2023 date mentioned the fewer IPO clients that we're adding but what we saw as a decent as a strong IPO sure on our ability to retain those new public companies is terrific.
So we're gonna benefit as we expect to see hopefully.
Prove men in the I P O market in late 2023.
The specs of reset so we have had companies reporting on there that have liquidated.
So we're working our way through that and we're finding floating in this back market.
So they need to get through the go forward, which is we're excited by what we see on the new E D platform.
We have the newest disclosure tool in the market it's.
It's modern price remains a strategic opportunity our clients want a choice and they're signing up for a multiyear agreements.
So the New act of disclosure contract length. The average is about 25 months. So our top priority has been in the transition of our clients from 83 now with a past we will focus on new logos competitive take away our sales enablement is reducing our sales cycle we have over.
Thousand clients on <unk> to our client C. D S N and a new a D. As a compliance leader so they're using active disclosure for their most important compliant need because your reference it's decades of a survey and the SEC client base, and we're making it easier for our clients to work.
Again award winning security so the active disclosure award last week for cutting edge security solutions.
Super Awesome for US and then the last point I'll make is our partners.
So our momentum and partners, whether it's flow cat diligent.
To policy, we are delivering solutions a lot of this is accelerated by act of disclosures integration with Microsoft Excel, It's a big differentiator as we previously discussed or causing that Sweet gave us awards for being partner of the year why because.
Their product.
Put two X L, which is made it with an act of disclosure and then this week. We're excited that we issued a press release of Dan mentioned around partnering with sales forces ESG solution that zero cloud, we're demonstrating we're partnering with the best fast software company.
To deliver what is going to be a terrific opportunity for the platform, which is E. S. T. A reporting marrying the financial data E. S. J D E S G data.
With a D to communicate with the SEC and investors.
Yeah. Thank you just lastly on the transactions in Q1 could.
Could you talk about the composition of I P. O's M&A, the N and the sequential pick up.
Is happening today here in.
I P o's or.
<unk> or.
Could you give us a little bit more color there. Please.
Yeah, right, we didn't specifically break it out but I you know I think we said that the the M&A market was down, but but not as weak as the I P. O market I think we're seeing activity across the board kind of trending in the right direction again in the context of a very weak invite.
<unk>, but but moving positively.
Okay, great. Thank you. Thank you for taking my questions I'll take this off line. Thank you.
Thank you rush.
And there are no further questions at this time Mister <unk> I'll turn the call back over to you.
Thank you and thank you everyone for joining US we'll look forward to our next call in August .
And this concludes today's conference call you may now disconnect.
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Right.
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