Q2 2023 Donnelley Financial Solutions Inc Earnings Call
Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the Donnelley financial solutions second quarter 2023 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be.
A question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad to withdraw your question Press Star One again I would now like to turn the conference over to Michael Chou head of Investor Relations. Please go ahead. Thank.
Thank you good morning, everyone and thank you for joining Donnelley financial solutions second quarter 2023 results conference call.
This morning, we released our earnings report, including a supplemental schedule of historical results copies of which can be found in the investors section of our website at defense 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 and further detailed in our most recent annual report on Form 10-K.
We 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.
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 extremely and Ken Turner.
I will now turn the call over to Dan.
Thank you Mike and good morning, everyone. We are pleased with the company's performance during the second quarter, especially in light of continuing softness in capital markets transactional activity.
In this difficult operating environment, we delivered strong second quarter results, including net sales of $242 $1 million and adjusted EBITDA of $74 $3 million, resulting in adjusted EBITDA margin of 37%.
Our second quarter performance once again demonstrated the resiliency of our operating model and the sustainability of our performance in a challenging external environment as our business mix continues to transform.
A key driver of our second quarter results is the improving performance of our software solutions portfolio.
Software solutions net sales growth accelerated in the second quarter to nearly 8% on an organic basis versus the second quarter of 2022, an increase from the growth trends over the last few quarters.
Importantly, the second quarter software solutions net sales growth was broad based with all three of our key software offerings are suite venue active disclosure.
Delivering stronger year over year growth compared to recent trends.
Software solutions made up approximately 31% of total second quarter net sales up approximately 440 basis points from last year's second quarter sales mix.
As a reminder, the second quarter largely due to the annual meeting and proxy season, historically represents our largest quarter overall, yet represents a seasonal low for software as a percentage of revenue.
On a trailing four quarter basis software sales of $284 million represented.
Approximately 36% of total sales an increase of approximately 590 basis points from the second quarter of 2022 trailing four quarter period.
Our second quarter adjusted EBITDA margin of 37% is nearly in line with last year's very strong second quarter adjusted EBITDA margin.
Despite a nearly $30 million or approximately 40% year over year reduction in capital markets transactional sales.
During the second quarter, we made progress in achieving additional efficiencies driven by process improvement and simplification. In addition to adjusting our cost structure to the current demand environment.
These actions in combination with our previous cost reduction efforts permanently reduce fixed costs simplify our operations and further improve deepens resiliency across various market conditions.
These cost saving has benefited our margins we continue to accelerate investments in certain areas of our business to drive recurring revenue growth and modernize existing business processes through the first half of the year. We are on track with our stated objective of investing approximately $25 million in 2023.
Related to these growth and modernization initiatives.
Which approximately two thirds of the total investment is incremental on a year over year basis.
As demonstrated by our performance the consistent progress against our plan is delivering outstanding results, specifically, our ability to thrive in difficult market conditions is a testament to the strength of our recurring offerings. These offerings, which span across both software solutions and tech enabled services sort of the ongoing compliance needs of corporations.
<unk> and investment companies and provide our business with stability during times of market volatility.
As we invest to accelerate our recurring growth while protecting market share in our traditional transactional offerings. We will continue to shift <unk> toward a higher mix of recurring revenue and more importantly benefit from the financial profile associated with such a recurring revenue model.
Dave will cover our results in more detail, but first I'd like to provide an update on the tailored shareholder reports regulation.
Which is a compliance date of July 2024.
We are making great progress in our technology development and go to market plans, both of which are aimed to help our mutual fund and exchange traded funds clients operationalize the reporting to comply with this regulation.
From a software product development perspective, our solution Leverages, the leading functionalities within arc suite will introducing additional features to create a modern and seamless client experience.
Coupled with decent service expertise and production capabilities. We have created a true end to end compliance solution that eliminates handoffs for our clients.
We are especially encouraged by the positive market feedback and the pipeline of recurring revenue.
Given our end to end solution, we expect sales will be recognized across multiple decent offerings, including software solutions Tech enabled services and print and distribution work.
We are currently working to quantify the estimated impact and look forward to providing additional details later this year or early next year.
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 the third quarter Dave.
Hi.
Thanks, Dan and good morning, everyone as Dan noted, we delivered strong second quarter results in a challenging environment.
Despite an ongoing reduction in year over year transactional volumes are focused efforts to execute our strategy have enabled <unk> to become fundamentally more profitable compared to historical quarters with similar level of overall sales and transactional activity.
By continuing to focus on operational efficiencies, while also growing our high margin software solution sales.
Second quarter adjusted EBITDA margin was approximately 900 basis points and 680 basis points higher than the second quarters of 2019 and 2020, respectively.
<unk> overall sales and transactional sales in this year's second quarter being slightly below the levels, we reported in those quarters.
Our second quarter results provide additional positive proof points that our strategy is working allowing us to deliver strong financial results across various market conditions, while also continuing to invest and evolving to a more recurring sales mix aggressively managing our cost structure and.
Being disciplined stewards of capital.
On a consolidated basis total net sales for the second quarter of 2023, or $242 1 million, a decrease of $24 $1 million or nine 1% on a reported basis and eight 3% on an organic basis from the second quarter of 2022.
Given the very weak transactional environment more than all of the year over year net sales decline occurred in capital markets transactional sales, which was down $28 1 million or 38, 2% versus the second quarter of 2022.
The decline in capital markets transactional sales was partially offset by growth in software solutions net sales, which increased $4 1 million or five 7% on a reported basis and seven 9% on an organic basis compared to the second quarter of last year and reached a new.
Quarterly net sales record.
Second quarter adjusted non-GAAP gross margin was 59, 5% approximately 150 basis points higher than the second quarter of 2022, primarily driven by the impact of cost savings initiatives and price increases, partially offset by lower capital markets transactional activity in it.
<unk> investments to accelerate our transformation.
Adjusted non-GAAP SG&A expense in the quarter was $69 $7 million at $2 $1 million decrease from the second quarter of 2022.
As a percentage of net sales adjusted non-GAAP SG&A was 28, 8% an increase of approximately 180 basis points from the second quarter of 2022.
The decrease in adjusted non-GAAP SG&A was primarily driven by the impact of cost control initiatives and a reduction in selling expense as a result of lower transactional sales volume.
We offset by incremental transformation related investments and higher bad debt expense.
Our second quarter, adjusted EBITDA was $74 $3 million, a decrease of $8 3 million or 10% from the second quarter of 2022.
Second quarter adjusted EBITDA margin was 37% a decrease of approximately 30 basis points from the second 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 expense as a result of lower sales volumes.
Turning now to our second quarter segment results net sales in our capital markets software solutions segment were $47 $7 million, an increase of six 5% on an organic basis from the second quarter of last year.
Sales of our recurring compliance product active disclosure grew approximately 9% in the second quarter with the recurring subscription component, increasing approximately 6% both of which reflect the expected improvement as we finalize the transition from 83, which was decommissioned in the second quarter.
The decommissioning represents an important milestone and enables us to focus on driving stronger growth for the new <unk> platform. While also realizing increased pricing higher retention rates and greater efficiency, we expect improved growth rates moving forward.
Net sales of our virtual data room offering venue were up $2 2 million or eight 7% compared to the second quarter of last year, driven by increased room activity and higher pricing.
Despite a continued steep decline in global M&A deal completions the level of underlying activity remains strong driven by the strong demand for high quality assets and the abundance of capital we.
We are encouraged by the resiliency of the underlying activity taking place on our virtual data room platform.
Adjusted EBITDA margin for the segment was 27, 7% an increase of approximately 870 basis points from the second quarter of 2022, primarily due to increased sales price uplifts from new ADN venue and efficiencies within our service organization, partially offset.
Net buy and increased overhead costs and incremental investments in technology development.
Net sales in our capital markets compliance <unk> Communications management segment were $122 9 million a decrease of 17, 8% on an organic basis from the second quarter of 2022, driven by lower capital markets transactional activity, partially offset by a modest year over year growth in <unk>.
Compliance revenue.
While the demand for equity transactions remained very weak on a year over year basis, we experienced a modest sequential increase in transactional revenue from the first quarter of this year consistent with the slight pickup in deal activity to start the second quarter, which we indicated on last quarter's earnings call.
Similar to what we experienced to start the quarter the transactional market for the second quarter also ended on a positive note with four priced ipos taking place towards the end of June representing the most active streak of IPO pricing. So far this year that said the overall IPO activity still remains.
Substantially lower than last year's second quarter.
The M&A market remains very weak with the number of completed M&A transactions down sequentially from the first quarter of 2023 and down approximately 40% versus last year's second quarter.
While the outlook for capital markets transactional environment is uncertain deepen remains very well positioned to capture a significant share of future demand for transaction related products and services when market activity picks up.
Additionally, the uptick in IPO activity in June and the transactional activity, we've seen to start the third quarter creates positive momentum entering the second half of the year.
The decline in capital markets transaction sales was partially offset by our capital markets compliance offering which grew approximately 1% from the second quarter of 2022.
Driven primarily by higher proxy volumes part of which is associated with the new pay versus performance disclosure and increased pricing.
Our second quarter compliance sales growth was against the backdrop of a very strong performance in the second quarter of 2022 during which capital markets compliance sales increased by approximately 31% versus the second quarter of 2021.
As discussed previously we faced a couple of headwinds in the quarter, including the timing shift of certain compliance volumes from the second quarter into the first quarter as well as the recent trend of increased back liquidations, which creates a headwind on the number of public companies and the associated demand for compliant services.
We were able to more than offset the combined impact of those headwinds by the increase in proxy activity and higher pricing.
Adjusted EBITDA margin for the segment was 36, 5% a decrease of approximately 470 basis points from the second quarter of 2022.
The decrease in adjusted EBITDA margin was primarily due to the lower transactional sales and higher bad debt expense, partially offset by cost control initiatives lower selling expenses as a result of lower sales volume and price increases.
Net sales in our investment company software solutions segment were $28 million, an increase of 10, 7% on an organic basis versus the second quarter of 2022, primarily driven by growth in subscriptions as a result of the continued strong adoption of our suite within investment company.
We are.
<unk> by the performance of Ark suite in the second quarter and remain optimistic about the opportunities created by regulations, such as tailored shareholder reports to drive future recurring revenue growth.
Adjusted EBITDA margin for the segment was 38, 2% an increase of approximately 420 basis points from the second quarter of 2020 to the.
The increase in adjusted EBITDA margin was primarily due to operating leverage on the increase in sales and efficiencies within our service organization, partially offset by higher product development and technology investments in support of growth opportunities.
Net sales in our investment companies compliance <unk> Communications management segment were $43 $5 million a decrease of two 3% on an organic basis from the second quarter of 2022, primarily driven by the exit of low margin print work.
Partially offset by price increases on the remaining work.
Adjusted EBITDA margin for the segment was 39, 3% approximately 660 basis points higher than the second quarter of 2022.
The increase in adjusted EBITDA margin was primarily due to a favorable sales mix the impact of cost reduction initiatives, including continued synergies from our print platform consolidation and price increases partially offset by higher overhead costs.
non-GAAP unallocated corporate expenses were $11 $6 million in the quarter, an increase of zero point $4 million from the second quarter of 2022, primarily driven by an increase in expenses aimed at accelerating our transformation, partially offset by the impact of cost control initiatives.
Free cash flow in the quarter was positive $7 million, a decrease of $23 $9 million as compared to the second quarter of 2022 a.
The year over year decline in free cash flow was driven by a decline in adjusted EBITDA higher restructuring and interest payments, partially offset by lower capital expenditures and lower cash tax payments.
We ended the quarter with $219 $8 million of total debt and $204 million of non-GAAP net debt, including $95 $5 million drawn on our revolver.
From a liquidity perspective, we had access to the remaining $203 $5 million of our revolver as well as $19 $4 million of cash on hand.
As of June 32023, 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 close to breakeven in the second quarter and generate more than 100% of our free cash flow in the second half of the year.
Our sales mix continues to evolve to proportionately more subscription based sales. We expect this seasonality to continue to become less significant.
Regarding capital deployment, we repurchased approximately 43000 shares of our common stock during the second quarter for $1 $9 million at an average price of $43 59 per share.
As of June 32023, we had $121 $1 million remaining on our $150 million stock repurchase authorization.
Given the ongoing high interest rate environment, and our floating rate debt, we continue to assign a higher priority to debt management in the second quarter, which resulted in lower share repurchases.
<unk> forward, we will continue to take a balanced approach toward 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 third quarter of 2023, while we expect the overall macro economic environment to remain challenging we are encouraged by the recent modest pickup in transactional activity.
We expect consolidated third quarter net sales in the range of $170 million to $190 million and adjusted EBITDA margin in the low to mid 20% range.
Year to the third quarter of last year.
The midpoint of our revenue guidance $180 million implies a year over year net sales decline of approximately 5% primarily as a result of lower transactional activity the less of a year over year decline than we experienced in the first two quarters of the year.
From an adjusted EBITDA margin perspective, our guidance of low to mid 20%.
Contemplates the lower level of transactional sales as well as incremental investments toward technology development and improving our operating efficiencies similar to the level of incremental investments made in the first and second quarters.
We expect our third quarter adjusted EBITDA margin to be once again, much stronger than historical quarters of like size total and transactional sales.
With that I'll now pass it back to Dan.
Thanks, Dave our performance in the second quarter offers a further proof point that our strategy and execution continue to make deeper and more durable and structurally resilient than in the past.
As we progress on our transformation journey, we will continue to invest in opportunities to drive profitable recurring revenue growth. While also continuing to aggressively manage our cost structure and being disciplined stewards of capital.
We are excited by the opportunities created by regulatory changes on the horizon, including tailored shareholder reports financial data Transparency Act.
ESG and the benefits they will bring starting in 2024.
In the meantime, we are focused on creating best in class regulatory and compliance solutions to help our clients comply with regulations finally, as we head into the second half of the year. We are encouraged by the improved trend in capital markets transactional activity.
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, if you'd like to ask a question simply press star followed by the number one on your telephone keypad. Our first question will come from the line of Charles <unk> with CJS Securities. Please go ahead.
Hi, good morning.
Good morning, Charlie I was hoping I was.
Hoping you could delve a little bit more into the cost reduction efforts you've been taking.
Really what's going on there to drive the margins.
Okay.
What portion of that is permanent versus temporary.
Looking at the guidance for Q3.
Could we see potential upside there from continued efforts there on the classroom.
Yes, Charlie it's Dave I'll take that one I think.
Certainly we've commented quarter in quarter out regarding cost reductions.
I would say the actions that we've taken are certainly permanent and they really range across.
Yeah.
Right across the company I think in fact, when you look at the gross cost reductions they are actually higher than.
What's reflected in our margin performance and we've noted in the past that we've redirected a portion of the savings too.
Really increased investment in other areas and predominantly that's product development.
<unk>.
Both of which are in support of our strategy to drive the software sales rose.
As well as to increase the proportionate amount of our recurring revenue.
And we're continuing to invest in those areas to create long term value.
I think on the permanence comment you can see that in our historical margin trends.
We have a slide in our investor deck it shows.
The historical transactional revenue in the company's consolidated margin.
Look at the trailing fourth quarter transactional revenue is right around $200 million, that's substantially below the historical average yet our EBITDA margin has improved by about 1000 basis points from.
Call it the mid teens to the mid 20%.
Despite the challenging environment.
Going forward. This will continue to be a focus for us certainly driving efficiencies, but also importantly, continuing to invest in our strategy.
Don't know if you wanted to add to that.
Yeah, Thanks, Dave and thanks for the question Charlie.
Yes couple of things just maybe amplify.
On an permanence.
As Dave said.
The majority of these are permanent and the reason being is that it's these are really most of them are changes driven by the change in the way, we do business and so.
There's a lot of externally facing improvements that have been made in terms of external products and the way we serve clients and then we've also spent over the past several years and more work ahead of us.
On transforming the inner workings of the company and how we do work and Thats also led to new.
New metrics being put in place.
New ways of monitoring et cetera, and that's also what's what's driven.
Efficiency within the company.
And as Dave said these are net numbers, we continue to invest both in new product development as Dave mentioned and then also in enhancing.
The employee value proposition, so we've done a lot.
Just to improve.
What we offer to.
The associates around the world, who are making the strong results happen and so.
Yeah.
A lot more ahead of us, but happy with what we've accomplished thus far.
Great. Thanks, and just a quick follow up when you look at the strength in software sales this quarter.
Maybe a little bit more color behind what drove that.
Yeah, the sustainability of that.
Into the back half of the year.
Yes sure so.
It was it was broad based as we mentioned and so maybe a little bit of a different story in each one.
We had signaled I'll start with active disclosure we had signaled.
That as we work towards the decommission of AED, three which occurred in.
June that that we expected to see in the back half.
Uplift in sales.
Sales growth.
We saw excuse me, probably a quarter earlier than expected and so feel good about the momentum that we have.
That product we have seen the venue.
We've seen really strong performance and we can go back and look at.
It just hasnt had the volatility that our transactions offering has had despite the fact that its main use case is M&A, obviously, there's a lot more.
Our broader use case for venue in terms of deals that may be private the private utilizing the deal room et cetera, but we've seen really strong performance.
That's been quarter in quarter out so feel feel good about that heading into the back half as well and at arc suite, which had strong growth in the quarter.
We had said the same that last quarter was.
A bit of a.
Depressed level, and we thought there would be higher.
Sales growth going forward, so again feel good there and Thats obviously.
Independent of what we're looking at in 'twenty four for our suite relative to the Tsi initiative.
Great. That's helpful. Thank you.
Thank you.
Your next question comes from the line of Kyle Peterson with Needham. Please go ahead.
Great. Thanks, Good morning, guys.
Wanted to touch a little bit on the guide and the some of the assumptions behind the capital market's expectations.
During the quarter and it sounds like you guys were kind of optimistic about how <unk> ended about how the quarter started so far but I guess, what assumptions you guys made in the guy or capital markets activity for the balance of the quarter is that kind of status quo in terms of what you guys have been seeing in the past.
Six weeks or so or any improvement or deterioration in the assumptions would be helpful.
Yes. Thanks for the question Kyle I think when you look at.
The guidance and what we're implying right and I'll talk sequentially at first right.
The transactional activity in capital markets.
I think went up $4 million to $5 million between Q1 and Q2, we're probably looking at <unk>.
Somewhere in that same range sequentially and the $50 million range again at the midpoint of our guidance and I think on a year over year basis then.
Yeah.
That decline.
It's still a decline, but certainly muted relative to the year over year declines then.
That we saw in Q1 and Q2 so.
I'd say cautiously optimistic right the activity in June .
Had a modest pick up in that obviously flowed through to the sequential impact in the quarter.
Essentially.
Expecting that sequential uptick again here.
Here in Q3.
That makes sense.
And I just wanted to do a quick follow up on compliance.
It seems like that came in really strong this quarter.
I know you guys called out both pricing in Pavers versus performance disclosures, but wanted to see if you guys could quantify or at least rank order on some of that upside in strength this quarter and maybe how much came from pricing versus whether it be kind of a <unk>.
Ross sell upsell or our share gains here with some of these newer initiatives.
Yes.
It's tough to break out specifically I would say.
The vast majority of that compliance.
Working again, I assume you're talking about the compliance <unk> Communications management segment and the compliance revenue there.
What was proxy related and again some of it driven by.
Pam performance et cetera, some of it driven by pricing to kind of blend together right as we're performing.
Additional work on behalf of the clients.
Aggregate pricing goes up so it's a bit too.
<unk> strip those two apart.
But generally proxy was the the overall driver there.
David do you want to add to that high it's Craig.
So from a compliance perspective Q2 of 'twenty two.
Big growth so over 27%.
Pleased with the 1% this quarter.
You mentioned the areas. It's a result of a number of things which is.
Increased client count.
New disclosure for Pavers versus performance.
Which is the tagging.
That exact comp table and then certainly price increases we are going to play.
Larry.
Environment, we were able to work with our clients.
Certainly capture the value that we're adding.
So in CNC, I'm compliance or our software.
We are really leveraging that entire team.
Deal experts here at <unk> and I think it shows the results show our expenses.
Network and relationships throughout this ecosystem is really benefiting our reoccurring business.
Whether it's our scientia Mark our certainly our software.
Alright, it makes sense that's helpful. Thanks, guys.
Thank you.
Your next question comes from the line of Peter Heckmann with D. A Davidson. Please go ahead.
Good morning, everyone. Thanks for taking the questions I wanted to talk a little bit about price again.
Hearing that come up.
It's always a good sign I guess.
You said it I missed it but I don't think you've quantified or can you talk a little bit about.
For the year about how much you think pricing is moving up and kind of how you allocate that between.
Regular price increases on software, but then.
That's kind of wage inflation related increases on tech enabled services.
Yes, Peter.
I think when you look at from a.
Pricing perspective.
Certainly vary from product to product Craig mentioned.
The inflationary environment and some of it's just the efforts too.
Keep up or at least mitigate some of that.
I think when you look at active disclosure and the transitions from.
83 to <unk>, we talked about.
The price levels going up.
Mid to high teens on average a lot of that work has taken.
Taking place over the last couple of years and so incrementally.
We're still ramping up on that product right and Thats probably.
Call it mid single digit.
In 2023, and then I think when you look in aggregate, it's probably much closer to low single digit on a consolidated basis for the company.
But again that will vary from from product to product.
To my earlier point.
When <unk> asked the question some of this is.
Yes, we are getting paid more but.
We're also doing more work so it's sometimes difficult to split that apart, but I think low single digit is a decent.
Indicator.
Okay.
And then great.
Yes, maybe just this is correct. So maybe just frame it a little bit it's capturing the value. So it's capturing the value we're delivering whether thats in the service.
Brown, whether it's our built in price increases on renewals.
It's the client recognizing the value of a better product.
So signing up for multi year contracts.
We have price as an opportunity.
With our competitors were able to deliver and bring them to us where our clients are able to buy what they want.
Not being forced to pay for modules.
They are not using so it's really an opportunity for us to capture the value.
But we're creating and meet the market where it's at.
Okay. That's helpful. That's helpful. And then we've been talking about tailored shareholder reports for a while and it does seem like an interesting opportunity. I know you are still trying to really get tight quantification of the potential benefit but could you give us some sort of.
Broad range.
Just thinking about the multiple share classes and some of the additional.
Work that might have to recur on a printing basis I mean is it reasonable to think.
Something in the range of 20.
$20 million annual benefit.
I'm just trying to figure out is it $10 million or $100 million in terms of the potential benefit.
Yeah, sure so I'll start and certainly Eric or Dave If you want to weigh in.
I think youre thinking about it the right way in terms of it'll be a broad based benefit across software.
Enabled services in print and distribution.
Certainly.
We'll put numbers out there as we've mentioned it'll be later this year or beginning of next year.
This is an opportunity that.
<unk> is our requirement that goes from fund level to share class levels. So you can think about.
A multiplier effect there.
That said.
Sure.
As Craig mentioned.
<unk> looked at charge based on the value that we add.
We also know this is compliance related work and our clients have.
Fee pressure et cetera on the fund and ETF side. So.
We're selling both into third party administrators, and we're also selling into asset managers.
And we'll look forward to providing.
Additional.
Guidance on the impact starting in it'll be a half year in 'twenty four but starting the end of this year beginning of next year.
Okay. Okay.
Hey.
Sorry, and just on Dan's comment.
The rule becomes effective mid year next year.
Depending on the.
The cycles that each of the funds report on.
The likely year, one impact will be.
Less than half a year.
Probably 25% as you get kind of the client's overlapping they're reporting timing and then the full impact.
Starting in 2025.
Alright, thank you.
Again to ask a question press star one on your telephone keypad and your next question will come from the line of Raj Sharma with B Riley. Please go ahead.
Yes, Thank you for taking my questions.
Congratulations on a good quarter.
Can I jump into the <unk>.
I'm trying to understand the outlook for Q3 better given the results in Q2 it seems.
Q3 outlook seems.
Conservative.
If I look at can you comment on transactions versus compliance.
Compliance.
The sequential.
Performance, you're expecting in Q3.
Up down.
Or transactions versus compliance.
And then.
Can we talk about the software or tech enabled part <unk> part.
Yeah Raj.
Steve So I think.
Yeah.
I'll reiterate what I said on <unk>.
Transactional right, if you think about transactional sequentially.
You look at Q1 and Q2, we went from $41 million to just over $45 million.
And are estimating at the midpoint of our guidance around $50 million spin.
Specific to transactional.
I think when you look at compliance.
That analysis is more challenging just given the.
The seasonality of the business, certainly <unk> and <unk> are much higher than than the compliance.
With sales that we drive in Q3 and Q4, but when you look at it on a year over year basis.
Compliance.
Was.
Call it flat to slight slightly up in the first half of the year.
And again at the midpoint of our guidance.
Kind of broadly flat or in that range for.
For the balance of the year and Thats inclusive of Q3.
And that's on the capital market side I think when you look at.
The.
Investment companies compliance work.
Again.
Some seasonality a little bit less.
Generally we have seen some of that compliant shift from traditional to software.
In the first couple of quarters compliance revenue in.
Investment companies was down.
I think $3 5 million box over the first half of the year and again expecting something in that range again in the back half of the year.
Got it.
Thank you and then on the on the Q2 results for <unk>.
Can you talk about the actual level of that.
The transactional.
Makeup.
Which was M&A and Ipos.
Okay.
Yes.
Yes.
So I can kick off and then Craig if you want to jump in with some additional detail here.
When we look at as we said started to see a little bit of.
Better IPO activity.
As we exited the quarter in June in.
The broad markets still look.
Pretty reasonable in July as well.
<unk> remained very very difficult.
We commented that that M&A was down.
40% on a year over year basis.
So.
Most of the benefit we saw was within within IPO Greg.
Greg anything to add there.
Yes, I think to reiterate.
Have an M&A market.
It certainly has been cigna.
Significantly chat.
Challenge.
To say the least when you look at.
The deals that are from.
Cap IQ, whether it's a $1 billion, whether it's $500 million you have to go back before.
2016 to find a market that even comes close in the quarter. It was it doesn't even beat the Covid 2020 year.
So certainly in the M&A market that was challenged for the deals that are announced.
We've been doing pretty well and holding our share there.
Many fewer and then from an IPO perspective.
It's a market that's rebuilding it is not fully opened yet.
Recovery is not going to be a straight line.
But there are reasons to be upbeat as we've talked about.
So we talked about the quarter.
We see a little bit of movement publicly in.
In July but a lot of it is still under the water line.
The pipeline for companies to go public publicly filed deals.
Deals over $100 million.
Now stands at 25.
Yes.
Our historic share of that which was strong and that does not include the companies who filed confidentially.
So that really gets at what our clients are telling us which is that the barriers to resurgence in the IPO market appear to be lifting.
So you can pick your metric whether it's the fed whether it's the NASDAQ but.
But what we're going to see is likely this backlog starting to clear.
In 2023, and then moving into 2024.
So certainly it's better to talk about the excitement, but it won't be a straight line as we accelerate.
Great. Thank you for that and then just lastly.
I know in the recent past you've talked about software sales.
<unk> guided to the next few years over the next few years doubling doubling of software sales.
Is that.
Is that a target we're still sticking to and what year are we talking about that you can you can double software sales by 25 or fiscal 'twenty six.
Yeah, So again, let.
Let me start on that Dave and then if you want to grab it.
So I think if you look at the historical.
And just when we spun out and we were about $135 million of software revenue.
And so you can.
Look at the doubling there.
Over several years obviously.
Given the product line there is.
Uneven or not a linear progression so in.
2021, I think we're up about 35% and software sales or something in that range.
And so as we look forward the guidance that we've given.
And venue as I've mentioned sensitive too.
M&A.
Is that.
That venue will have slightly lower growth than that compliance offerings.
And we're starting to see the compliance offerings pick up some speed obviously.
<unk> talked about.
The tsi regulation and some additional regulations that'll be helpful with part of the benefit.
Hitting in the software area and part of the benefit.
Hitting in other areas of the company.
Right so.
Getting to the $600 million in software revenues.
It implies a pretty strong growth rate out to is that $2025 2026.
Im period.
And Raj and Thats, all Im sorry, it was.
$500 million.
And Thats in 2026.
Yes, which is like where are you.
Get to the $50, 55% to 60% which is the.
Of the total or so.
Got it Okay got it thank you.
And that's all for me. Thank you I'll take it offline.
Great. Thank you.
I will now hand, the call back over to Dan Lee for any closing remarks.
Great. Thank you Regina and thank you everyone for joining us and we look forward to speaking in the near future. Thank you.
That will conclude today's conference. Thank you all for joining you may now disconnect.
Okay.
Yeah.
We will conclude today's conference. Thank you all for joining you may now disconnect.
Okay.