Donnelley Financial Solutions Q1 2025 Earnings Call Transcript

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Provided by Quartr
April 30, 2025
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Operator

Thank you for standing by. My name is Eric, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelly Financial Solutions First Quarter 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.

Operator

I would now like to turn the call over to Mike Zhao, Head of Investor Relations. Please go ahead.

Mike Zhao
Mike Zhao
Head, IR at Donnelley Financial Solutions

Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions' first quarter twenty twenty five results conference call. This morning, we released our earnings report, including a set of supplemental trending schedules of historical results, copies of which can be found in the Investors section of our website at dfinsolutions.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 details in our most recent annual report on Form 10 ks, quarterly report on Form 10 Q and other filings with the SEC.

Mike Zhao
Mike Zhao
Head, IR at Donnelley Financial Solutions

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 Lieb, Dave Gardella and other members of management.

Mike Zhao
Mike Zhao
Head, IR at Donnelley Financial Solutions

I will now turn the call over to Dan.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

Thank you, Mike, and good morning, everyone. We delivered strong consolidated first quarter results with net sales of $201,100,000 adjusted EBITDA of $68,200,000 and adjusted EBITDA margin of 33.9%. Given our stock trading levels, strong balance sheet and perspective on long term value, during the first quarter and into the second quarter thus far, we have repurchased approximately 5% of the company's outstanding shares. While we recognize the uncertainty in the near term global operating environment, recent trading prices have provided an opportunity to be more aggressive in this area. I am encouraged by the continued growth in our software offerings where we delivered year over year net sales growth of approximately 6% on an organic basis, driven by approximately 16% growth in our recurring compliance and regulatory driven products, ActiveDisclosure and ArcSuite that more than offset a decline in the Venue Data Room product.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

Software Solutions net sales represented 42.1% of total net sales in the first quarter, an increase of approximately two sixty basis points from last year's Software Solutions net sales mix. On a trailing four quarter basis, Software Solutions net sales made up 42.8% of total net sales, an increase of approximately 500 basis points from the first quarter twenty twenty four trailing four quarter period. On both a quarterly and trailing four quarter basis, Software Solutions represented the largest component of our overall sales mix, a positive proof point of our progress in becoming a software centric company. This positions us well to achieve our long term target of deriving approximately 60% of total net sales from Software Solutions by 2028. During the quarter, ActiveDisclosure and ArcSuite each posted double digit sales growth for the second consecutive quarter.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

For ActiveDisclosure, this improvement was primarily driven by the continued adoption of our service package offerings combined with growth in subscription revenue as a result of higher net customer count from recent wins as well as higher value per client. In the case of ArcSuite, the improved growth rate was primarily driven by the tailwind from the tailored shareholder reports regulation, which became effective mid last year. As it relates to Venue, following robust growth over the last several quarters, Venue sales declined moderately in the first quarter as we overlapped several large deal rooms. We remain encouraged by Venue's performance, which benefits from stable demand from both announced and unannounced deals across public and private companies alike, despite some volatility inherent in the broader M and A market in terms of completed deals. While Venue serves both public and private company deals, whether announced or still in the diligent process, our capital markets transactional offering primarily serves public company, M and A, IPO and debt transactions.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

Our capital markets transactional revenue, while improving on a sequential basis from the fourth quarter of twenty twenty four, continued to be depressed by the combination of market volatility, macroeconomic headwinds and heightened uncertainty. Despite the ongoing downturn in global capital markets transactional activity, our business has proven to be fundamentally and substantially more profitable than historically. Our adjusted EBITDA margin of 33.9% in the quarter reached 29.5 on a trailing four quarter basis despite the ongoing headwinds of a weak transactional market. 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. We continue and invest to shift toward a more favorable recurring sales mix while continuing to aggressively manage our cost structure and being disciplined stewards of capital.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

A key factor behind our margin performance has been the progress we have made toward 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 actions that targeted many aspects of our fixed cost base, including downsizing our print production platform, driving internal efficiencies and reducing our physical footprint. During the quarter, we maintained the same disciplined approach and will continue to manage our cost structure prudently, especially in light of the current economic landscape and uncertainty. As we continue to gain efficiency across our operations, we also remain focused on reinvesting in areas of our business to accelerate our transformation. In the first quarter, we continued to invest in our software offerings and the associated technologies to support continued innovation and growth.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

The investments we are making also enable us to modernize our business operations by applying automation and AI driven tools, including commercial AI solutions and our own AgenTeq AI development to streamline workflows, improve productivity and support profitable growth. These investments will help to profitably scale existing products, increase our speed to market for future offerings and enhance client experience. Before turning the call over to Dave, I'd like to provide some perspective on DFIN's operating characteristics as we operate in a new and evolving global economic environment. While much uncertainty exists, we presently do not anticipate any significant impact on our operations based on the recently announced tariffs, in large part due to the nature and structure of our business. Our business is primarily software and services and predominantly U.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

S.-based. We have a relatively simple supply chain that has continued to operate without disruption. With approximately 90% of our revenue derived from The U. S, our software products and services are largely insulated from current trade pressures. In the cases where we do see input costs rising, we expect to be able to increase our prices.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

In addition, approximately 75% of our revenue is based on recurring and reoccurring sources, the vast majority of which is related to ongoing SEC compliance for which core regulations have thus far not been impacted. Our strong mix of recurring compliance offerings provides stability during times of market volatility. Of course, our clients that operate across different industries will have varying impacts to their operations. As it relates to our event driven capital markets transactional offering, while the global deal environment is yet to emerge from more than three years of historically low activity, the underlying latent demand for transactions remains intact. From a market demand perspective, recent comments from the SEC are encouraging.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

The Commission's desire for regulations to be more tailored, avoiding unnecessary burdens on public companies will support future IPO activity and ongoing compliance needs. And while we do not expect to return to normalized levels transactions until market uncertainty subsides, DFIN remains very well positioned to support our clients when that occurs. Finally, our strong balance sheet and ample liquidity enable us to confidently execute our strategy and drive long term shareholder value. With our non GAAP net leverage ratio under one times and robust annual free cash flow generation, our strong financial flexibility enhances our ability to execute our transformation. We will continue to allocate capital disciplined and thoughtful manner that best advances our strategy and maximizes shareholder value.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

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?

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Thanks, Sam, and good morning, everyone. Before I discuss our first quarter financial performance, I'd like to recap one housekeeping item in the quarter. During the first quarter, we amended and extended our credit agreement to provide for a $115,000,000 Term Loan A and to extend the maturity of the $300,000,000 revolving credit facility. Both instruments have maturity dates of 03/13/2030. The proceeds from the Term Loan A and the revolving credit facility were used to retire in full the $125,000,000 outstanding on the prior Term Loan A.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

This transaction combined with our strong free cash flow generation continues to provide DFIN with abundant financial flexibility to execute our strategy. Now turning to our first quarter results. As Dan noted, we delivered solid first quarter results in a challenging environment highlighted by a strong year over year increase in adjusted EBITDA and adjusted EBITDA margin expansion. We posted approximately 6% organic growth in our Software Solutions net sales, including approximately 16% sales growth in our recurring compliance software products, all while continuing to drive operating efficiencies and expanding adjusted EBITDA margin to 33.9%. As Dan noted earlier, we've made tremendous progress in aligning our cost structure and operating model to our evolving business mix over the last several years, downsizing our print production platform, driving internal efficiencies and reducing our physical footprint.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

We maintain the same disciplined approach in the quarter and will continue to take a similar approach going forward. On a consolidated basis, total net sales for the first quarter of twenty twenty five were $201,100,000 a decrease of 2,300,000 or 1.1% from the first quarter of twenty twenty four. First quarter revenue was above the high end of our guidance range and was aided by better than expected event driven transactional revenue within capital markets and favorable timing in investment companies compliance volume, a component of which was realized through higher print and distribution revenue within this segment. In addition, Software Solutions net sales, which increased $4,300,000 or 5.8% on an organic basis compared to the first quarter of last year helped to partially offset the decline in capital markets compliance revenue of $7,800,000 versus the first quarter of twenty twenty four, part of which was related to lower print and distribution volume consistent with recent trends. First quarter adjusted non GAAP gross margin was 63.7%, approximately three ten basis points higher than the first quarter of twenty twenty four, primarily driven by a favorable sales mix, the impact of cost control initiatives and price uplifts, partially offset by lower capital markets compliance volume.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Adjusted non GAAP SG and A expense in the quarter was $59,900,000 an $8,200,000 decrease from the first quarter of twenty twenty four. As a percentage of net sales, adjusted non GAAP SG and A was 29.8%, a decrease of approximately three seventy basis points from the first quarter of twenty twenty four. The decrease in adjusted non GAAP SG and A was primarily driven by a reduction in selling expense related to lower sales in certain areas, the impact of cost control initiatives and lower bad debt expense. Specific to our bad debt expense, as a result of our strategy to deprioritize low quality transactional deals including certain de SPAC transactions which have higher collections risk, we realized the reduction in bad debt expense during the first quarter compared to our recent experience. As we continue to prioritize higher quality deals, we expect our bad debt expense profile to continue to normalize going forward.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Our first quarter adjusted EBITDA was $68,200,000 an increase of $13,000,000 or 23.6% from the first quarter of twenty twenty four. First quarter adjusted EBITDA margin was 33.9%, an increase of approximately six eighty basis points from the first quarter of twenty twenty four, primarily driven by a favorable sales mix, the impact of cost control initiatives and lower bad debt expense, partially offset by lower capital markets compliance volume. Turning now to our first quarter segment results. Net sales in our Capital Markets Software Solutions segment were $51,900,000 a decrease of $1,100,000 or 1.7% on an organic basis from the first quarter of last year, driven by Venue, which was down $3,100,000 or approximately 9% year over year, partially offset by the growth in ActiveDisclosure. During the first quarter, ActiveDisclosure sales grew approximately 11%, a continuation of the stronger growth rate we experienced during the fourth quarter of last year.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

We continue to make progress to expand the adoption of Active Disclosure services packages providing a strong base of contracted recurring revenue. Also benefiting the growth was the migration of certain traditional activities to ActiveDisclosure. As we increasingly serve our clients via software solutions, we experienced a shift of certain activities which were historically performed on our traditional services platform to active disclosure including compliance work such as annual proxy documents. While the shift from traditional compliance to active disclosure during the first quarter was modest, We expect this trend to continue in the future, driven by the improved capabilities of our software platform and evolving client preference to work in a hybrid environment, leveraging both our software and unmatched service and domain expertise. We remain encouraged by ActiveDisclosure's continued growth in client count and higher average price per client, which combine to create a solid foundation for future revenue growth.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

As expected during the first quarter, Venue faced tough comparisons as we overlapped several large projects which benefited last year's first quarter sales. In aggregate, those large projects accounted for approximately $4,000,000 of net year over year impact, which more than offset the underlying growth in Venue sales. We expect the year over year impact from large projects to continue in the second quarter albeit at less of a headwind than in the first quarter approximately $2,000,000 Adjusted EBITDA margin for the segment was 26.8%, a decrease of approximately 300 basis points from the first quarter of twenty twenty four, primarily due to lower sales volume and an unfavorable sales mix, partially offset by the impact of cost control initiatives. Net sales in our Capital Markets Compliance and Communications Management segment were $83,900,000 a decrease of $7,200,000 or 7.6% on an organic basis from the first quarter of twenty twenty four driven by lower compliance volume partially offset by higher transactional revenue. In the first quarter, we recorded $48,600,000 of capital markets transactional revenue, a modest increase from the $48,000,000 we delivered in last year's first quarter.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Following a very weak fourth quarter of twenty twenty four, where we recorded a lowest level of transactional revenue in our history, the global equity deal market rebounded modestly to start the first quarter with January and February deal volume, especially IPO transactions that raised over $100,000,000 exceeding last year's levels. However, escalating macroeconomic headwinds and tariff uncertainty resulted in an increased market volatility and limited deal activity in March. In short, the global deal environment in the first quarter was very soft compared to historical averages and this weakness will persist with market uncertainty. For transactions that we completed in the first quarter, we maintained our historical high market share reflective of DFIN's strong market position. Capital Markets Compliance revenue was down $7,800,000 primarily due to our continued exit of certain low margin proxy statement activity and the related print and distribution consistent with our approach during last year's proxy season.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

In addition, we continue to experience lower market demand for certain event driven filings such as eight ks and special proxies associated with corporate transactions given the softness in that market. Finally, as I commented earlier, certain activities which were historically performed on our traditional services platform shifted to active disclosure. Adjusted EBITDA margin for the segment was 43.7%, an increase of approximately nine twenty basis points from the first quarter of twenty twenty four. The increase in adjusted EBITDA margin was primarily due to lower selling expense, cost control initiatives and lower bad debt expense, partially offset by lower sales volume. Net sales in our Investment Company Software Solutions segment were $32,700,000 an increase of $5,400,000 or 20.2% on an organic basis versus the first quarter of twenty twenty four, primarily driven by incremental revenue from our tailored shareholder report solution.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

On a trailing four quarter basis, total ARC suite reached approximately $122,000,000 in revenue and grew approximately 13% compared to the first quarter twenty twenty four trailing four quarters, driven by growth in subscription revenue including the impact of the tailored shareholder report solution. Based on the mid year twenty twenty four effective date, we will continue to realize incremental revenue from tailored shareholder reports in the second quarter of twenty twenty five. Adjusted EBITDA margin for the segment was 39.1%, an increase of approximately nine eighty basis points from the first quarter of twenty twenty four. The increase in adjusted EBITDA margin was primarily due to operating leverage on the increase in net sales and price uplifts partially offset by higher service related costs associated with the tailored shareholder reports offering. Net sales in our Investment Companies Compliance and Communications Management segment were $32,600,000 an increase of $600,000 or 2.2% on an organic basis from the first quarter of twenty twenty four, primarily driven by the timing shift of certain print and distribution volume related to the tailored shareholder reports for the regulated insurance market from the second quarter into the first quarter and higher event driven transactional revenue.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

The timing shift related to tailored shareholder reports in addition to the broader secular decline in the demand for printed products will result in lower print and distribution revenue in the second quarter compared to the second quarter of last year. Adjusted EBITDA margin for the segment was 37.4%, approximately eleven eighty basis points higher than the first quarter of twenty twenty four. The increase in adjusted EBITDA margin was primarily due to higher sales, a favorable sales mix and cost control initiatives. Non GAAP unallocated corporate expenses were $7,400,000 in the quarter, a decrease of 800,000 from the first quarter of twenty twenty four, primarily due to cost control initiatives and lower healthcare expense. Free cash flow in the quarter was negative $51,000,000 10 point 8 million dollars unfavorable compared to the first quarter of twenty twenty four.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

The year over year decline in free cash flow was primarily driven by unfavorable working capital timing and elevated performance based payments in the quarter related to full year 2024 performance partially offset by higher adjusted EBITDA. We ended the quarter with $189,500,000 of total debt and $173,300,000 of non GAAP net debt including $75,000,000 drawn on our revolver. As of 03/31/2025, our non GAAP net leverage ratio was 0.8 times. 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.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Regarding capital deployment, we repurchased approximately 861,000 shares of our common stock during the first quarter for $41,800,000 at an average price of $48.57 per share. As of 03/31/2025, we had $49,500,000 remaining on our $150,000,000 stock repurchase authorization. Based on our confidence in the strategy and our strong belief in the value of DFIN, we view share repurchases as a very attractive use of cash, especially at the prices we experienced during the last six weeks of the quarter and throughout April. As such, in a continuation of our historical approach of being much more aggressive with share repurchases at lower prices, so far in April in accordance with our pre established trading parameters, we have repurchased an additional 657,000 shares for $27,600,000 at an average price of just over $42 per share through April 29. On a year to date basis, we've repurchased approximately 1,500,000.0 shares for $69,400,000 at an average price of $45.75 per share.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

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'll remain disciplined in this area. As it relates to our outlook for the second quarter of twenty twenty five, we expect a challenging operating environment driven by market volatility and ongoing uncertainty. Further, we expect a reduction in print and distribution revenue in the second quarter based on both the timing shift of certain print and distribution volume from the second quarter into the first quarter that I discussed earlier as well as the reduction in volume of printed pages associated with the tailored shareholder reports rule both of which impact the investment companies Compliance and Communications Management segment. With those factors as the backdrop, we expect consolidated second quarter net sales in the range of $215,000,000 to $235,000,000 and adjusted EBITDA margin in the mid-thirty percent range. Compared to the second quarter of last year, the midpoint of our consolidated revenue guidance $225,000,000 implies a reduction of approximately $18,000,000 or 7% year over year as lower print and distribution sales including the timing benefit reflected in our first quarter results is expected to more than offset growth in ArcSuite and ActiveDisclosure.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

We expect Venue to decline at a rate similar to what we experienced in the first quarter in part due to the revenue associated with outsized rooms in last year's second quarter. Further, our estimates assume capital markets transactional revenue in the range of $35,000,000 to $45,000,000 which at the midpoint is down approximately $5,000,000 from last year's second quarter. In addition and related to my earlier comments regarding the impact of the transactional environment on certain compliance filings, most notably special proxies and eight Ks, our second quarter estimate assumes a modest year over year decline in our compliance based sales within this segment, part of which is related to print and distribution. With that, I'll now pass it back to Dan.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

Thanks, Dave. Our strong performance in the first quarter was the result of the historical and current disciplined execution of our strategy, which again demonstrated DEFIN's ability to perform across varying market conditions. Our focus remains on accelerating our business mix shift by continuing to grow our 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 tailwinds. In addition, we will continue to aggressively manage our costs and drive operational efficiencies, while maintaining our historical discipline in the allocation of capital.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

As I noted earlier, the latent demand for transactions and a more favorable regulatory landscape combined with our market leadership is a significant opportunity for DFIN going forward. Market volatility and uncertainty, however, must subside for this opportunity to materialize. Before we open it up for Q and A, I'd like to thank the DFIN employees around the world who have been working tirelessly to ensure our clients continue to receive the highest quality

Operator

Your first question comes from the line of Charlie Strauzer with CJS Securities Incorporated. Please go ahead.

Charlie Strauzer
Senior Managing Director at CJS Securities

Hi, good morning. Just a couple of quick questions here. Margins were significantly higher than expected, especially versus guidance. Coming in at the high end of your guidance range for revenue, just if you could perhaps provide us with a little bit more color on what kind of what drove that and perhaps some acceleration of or pull forward of the expense reduction efforts?

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Yes, Charlie. Thanks for the question. A few factors there and a couple of things you noted are actually tied together. But I would say first and we highlighted this on the fourth quarter call, the soft transactional market that we saw exiting the year and we had taken some incremental cost reduction actions that in permanent cost reduction actions. And I would say in the first quarter, those came in better than what we had anticipated.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

The second factor is the higher revenue and the operating leverage associated with that revenue outperformance. And when you look at that outperformance, it was, I'd say, predominantly a combination of two things. The first was higher capital markets transactional sales. We posted revenue of about $49,000,000 which was about $4,000,000 higher than our guidance. And then also, as I mentioned in the prepared remarks, we had some favorable timing in investment companies, and that was probably $3,000,000 or so of sales that we had assumed would be recognized in Q2 and that moved up in Q1.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

And again, when you look at the incremental margins on this higher revenue, very strong. And then I would say the third thing, and again mentioned this in the prepared remarks and we also commented on it, on the fourth quarter call, we've really been taking a much more discerning approach on the quality of transactions that we're accepting due to the collections risk on some of the lower quality deals. So related to this, bad debt expense came down in the quarter about $2,700,000 versus the first quarter of last year. While we expected a decrease, I would say this decrease was more than we had contemplated certainly in our guidance. And we'll expect this trend to continue in a positive direction, though it's really tough to predict exactly how that declines over time.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

But we're starting from a pretty high watermark coming off of last year's bad debt expense number and looking to drive that down more toward historical averages.

Charlie Strauzer
Senior Managing Director at CJS Securities

Got it. That makes sense. Just secondly, just looking at your guidance for Q2, maybe some more color on the segment level basis into your the assumptions behind that.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Yes. I think when you look at overall, you have the numbers. Obviously, we talked about it in the prepared remarks. I think when you dive into the segments, if I start with capital markets, right, we expect from a product perspective, active disclosure to continue to perform well from a year over year growth perspective. Venue, as we talked about, has a tough comp really all year long, but certainly we saw it in Q1 and we'll see that again in Q2.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

And then I think when you look at the Capital Markets Compliance and Communications Management segment, And I'll start with the compliance work. We talked about some print being down and expect the compliance revenue to continue to decline modestly on a year over year basis. And again, a lot of that's related. The biggest wildcard there would be transactions. And obviously, we gave a pretty wide range for this quarter.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

And as we said in the prepared remarks that until the markets have some certainty and less volatility, we would expect the transactional side to be relatively soft. As I move over to investment companies on the software side, we'll continue to see the benefit in ArcSuite predominantly related to the tailored shareholder reports regulation. We'll start to overlap that benefit in the second half of the year. But certainly in Q2, would expect to see the benefit again similar to what we saw in Q1. And then on the investment companies compliance and communications management, probably the biggest item there is the piece that I just mentioned on the timing shift, about $3,000,000 of revenue shifted out of what we expected for Q2 and really on a year over year basis, right, would have been comparable to last year's Q2.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

And so would expect some the trend in that segment to be softer in Q2 than certainly what we experienced in Q1.

Charlie Strauzer
Senior Managing Director at CJS Securities

Great. Thanks, Dave.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Sure.

Operator

The next question comes from the line of Pete Heckmann with D. A. Davidson. Please go ahead.

Pete Heckmann
MD & Senior Research Analyst at D.A. Davidson

Good morning, everyone. Thanks for taking the question.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Good morning, Pete.

Pete Heckmann
MD & Senior Research Analyst at D.A. Davidson

Good morning. I wanted to see if you can comment a little bit on share on the active disclosure side, How the trends been there over the past four quarters? And, you know, are you seeing a little bit kind of a a maybe a lead, but a bit of pulling away from the pack in terms of it seems like maybe there's one or two competitors that actually have the ability to invest, in in the feature functionality of software, and then some of the smaller players, may not have that ability. Would you agree? And and, you know, do you do you see that becoming a bigger differentiating factor over the next five years?

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Yeah. Pete, it's Dave again. And I'll start and then Craig can comment with some more details. I think, certainly, from a trend perspective and new client logos and as we mentioned price per client, we continue to make good progress there from an overall market perspective. And the other aspect that we're seeing in active disclosure and then also expect that to continue to be a trend that as clients continue to want to work more and more in a hybrid model, that's certainly going to benefit us.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

We're having the best of both worlds in terms of being able to leverage the software as well as the traditional service domain expertise, etcetera. But I'll let Craig comment on some more of the details.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

Yes. Thanks, David. It's Dan. Before Craig goes, just on the second question that Pete had on ability to invest. And we are seeing the benefits.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

We saw it even in the TSR or Tailored Shareholder Reports regulation of the investments that we've made historically in the platform and the ability to get into market faster, and it does build on itself. And that with our prioritization of capital allocation towards organic investment first and going forward with our transformation, we do see that as a big differentiator. And so I'll pass that off to Craig.

Craig Clay
Craig Clay
President of Global Capital Markets at Donnelley Financial Solutions

Yes. To build on those comments, after having completed our platform transformation last year and modest growth, we're certainly really pleased with where we are in Q4, Q1 performance and perspective metrics. The progress we're making is reflected, and you'll continue to see that. Q1 was our seventh consecutive quarter of net client growth. Our subscription revenue continues to grow.

Craig Clay
Craig Clay
President of Global Capital Markets at Donnelley Financial Solutions

Our ACV growth shows we're selling at a higher value per client, as mentioned. We're increasing our percentage of three year contracts. So our clients are locking in, which makes future revenue more predictable. And then we've had sequential improvements in revenue retention rates. As well as our service revenue is up 36% in the quarter, driven by significant increases in our service package sales, again, predictable revenue.

Craig Clay
Craig Clay
President of Global Capital Markets at Donnelley Financial Solutions

Our clients love AD service. It leads the market. They like predictable packages, and it creates this predictable mix of recurring revenue for DFEN. If you look at the market, our solution is the most advanced, specifically designed disclosure tool. We have decades of serving SEC clients, and we have a price opportunity.

Craig Clay
Craig Clay
President of Global Capital Markets at Donnelley Financial Solutions

We have product improvement that Dan spoke of with our investment. Our clients for proxy this season are using the newest editor on the market. The creative work for proxy and other documents in AD is incredible. We've added presentations to that, which is a full connection of a single source to their truth to all creative teams, whether they're creating something for the board, investor, and all of that imports and exports from a d to PowerPoint. Lastly, the hybrid solution that Dave mentioned, it's a great opportunity for us to marry our traditional platform with software.

Craig Clay
Craig Clay
President of Global Capital Markets at Donnelley Financial Solutions

We're the only ones that can do that. And over time, this will create an even stronger foundation for sustained growth. So thanks for the question.

Pete Heckmann
MD & Senior Research Analyst at D.A. Davidson

Okay. That's all really helpful and good to hear. Dave, just one quick follow-up. In terms of the new credit facility, how will that change, if at all, your weighted average cost of debt?

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Yeah, Pete. So it's no substantial changes in terms of the overall terms in the transaction. There were a handful that all worked to the company's benefit, which was great to see. I would say, secondly, that it's all variable rate debt. So so far plus a spread and that spread is based on different tiers of our basically our net leverage range.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

And so we're currently sit at the lowest tier of that spread. So it'll all be tied to SOFR. I think when you look at the all in right now is in the probably 7% range or so.

Pete Heckmann
MD & Senior Research Analyst at D.A. Davidson

Okay. Okay. That's helpful. I appreciate it. I'll get back in the queue.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

Thank you.

Operator

Your next question comes from the line of Kyle Peterson with Needham. Please go ahead.

Kyle Peterson
Senior Analyst at Needham & Company

Great. Thanks, guys. Good morning. I wanted to start off on ARC Suite. Growth has been really impressive here.

Kyle Peterson
Senior Analyst at Needham & Company

It's in the second quarter in

Kyle Peterson
Senior Analyst at Needham & Company

a row. We've seen a nice nice pop in the the year on year growth rates. Just wanna see, like, is this kind of a sustainable, like, central paradigm shift here for for growth within that that product, or is there anything, like, lumpy or one time that we need to be mindful of when when modeling out Workspace moving forward?

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Yeah. Kyle, it's Dave. Thanks for the question. So probably the the one factor that is a bit lumpy would be the piece that we're seeing as it relates to the tailored shareholder report regulation. So we started recognizing revenue on that last year in Q3.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

And so we saw the benefit in the back half last year. We're getting the incremental kind of annualization of that revenue in the first half of this year. And then we'll start to overlap that in the third quarter. I would say the other factor that we will see all year long is some benefits of increased pricing that affect the Oak Suite. And then Eric can provide some more details on what we're seeing in the business.

Eric Johnson
Eric Johnson
President of Global Investment Companies at Donnelley Financial Solutions

Yeah. Hey. Thanks, Dave. Thanks for the question, Kyle. You know, in addition to the TSR lift, I I think it's important to kind of structure out what we mean.

Eric Johnson
Eric Johnson
President of Global Investment Companies at Donnelley Financial Solutions

From a from a TSR perspective, we're talking reporting, tagging, filing, web hosting, edelivery, complex mailing, as well as digital output. So it's a very broad spectrum of services that TSR drives, and Deepin's very well positioned to handle the full spectrum of services. But specific to your software question, we've had key contract renewals, which are very important for the year. We are seeing growth with existing clients across our ARC suite offering, and we're also seeing strong price performance. So TSR, as Dave mentioned, certainly an aspect of the growth, but in the core fundamentals of the ARC Suite platform, we're seeing positive results.

Eric Johnson
Eric Johnson
President of Global Investment Companies at Donnelley Financial Solutions

Not to mention, I believe it's our twenty fifth consecutive quarter of growth in this segment. So we're encouraged by the performance we've seen in Q1. And obviously, we'll take advantage of the TSR opportunities that we'll see, but very pleased with the overall fundamentals of software business within ArcSuite.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

Okay.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

Yeah. The last thing I'd add, Kyle, just on that piece is suite as the software product and then the related service expertise and domain expertise that goes around it. And even more so than on the corporate side, the funds and regulated insurance folks value that service. And Dave spoke to how much it's valued on the corporate side. So it's not to diminish that, but they value it even more.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

And I think it's based more on the funds outsourced model. And so we see a lot of benefit from and very high customer satisfaction scores with the service that they receive. And so that's another differentiator that supports Eric's comments about the holistic system.

Kyle Peterson
Senior Analyst at Needham & Company

Okay. That's that's really helpful. Appreciate it. And then, I guess, as a as a follow-up, you know, great to see you guys really, you know, stepped up the buyback pace here, both in in the first quarter and in April. I guess, as long as, you know, the share price remains, you know, below historical or or recent valuations, is this something you guys could continue to to buy back at a at a faster clip like you you have been recently?

Kyle Peterson
Senior Analyst at Needham & Company

Or or do you think this will kind of normalize back down, given you guys have bought back such a good amount of the shares in the last few months here?

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

Yes. Tyler Oh, go ahead.

David Gardella
David Gardella
CFO at Donnelley Financial Solutions

I was going to say, we've been very consistent on this in terms of being more aggressive at lower prices and less aggressive, but still in the market at higher prices. And as we commented on the prepared remarks, still view share repurchases one of the priorities in terms of capital deployment. And Dan, I think I cut you off. So go ahead.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

Yes. No, you hit it. The only thing I'd add is we have used a grid, to Dave's point, much more aggressive at lower prices. Feel really good about the future performance of the business, notwithstanding some market choppiness currently in uncertainty, but the opportunity to create a lot of value for shareholders. And so it is one of the second to executing the transformation and the strategy, really important that we continue to buy back and then certainly within the confines of overall leverage, etcetera.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

And so that's how we think about it.

Kyle Peterson
Senior Analyst at Needham & Company

Okay. That's great color. Thank you.

Operator

There are no further questions at this time. I'd now like to turn the call over to Dan Lieb for closing remarks. Please go ahead.

Daniel Leib
Daniel Leib
President and CEO at Donnelley Financial Solutions

Great. Thank you, Eric. And yes, thank you, everyone, for joining us, and we'll look forward to speaking with you in a few months and seeing you at some conferences in the interim.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

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Key Takeaways

  • Donnelley delivered $201.1 million in net sales and $68.2 million in adjusted EBITDA in Q1, achieving a 33.9% adjusted EBITDA margin and repurchasing approximately 5% of its outstanding shares.
  • Software Solutions net sales grew about 6% organically, led by roughly 16% growth in recurring compliance products, and now account for over 42% of total net sales (up 260 bps YoY) en route to a 60% target by 2028.
  • ActiveDisclosure and ArcSuite each posted double-digit sales growth for the second consecutive quarter—ActiveDisclosure from stronger subscription and service-package adoption, and ArcSuite on the regulatory tailwind from tailored shareholder reports.
  • Structural cost optimizations (print platform downsizing, internal efficiencies and AI investments) drove expansion of the EBITDA margin by nearly 500 bps on a trailing-four-quarter basis, demonstrating sustainable profitability across market cycles.
  • For Q2, DFIN forecasts net sales of $215 million to $235 million and a mid-30% adjusted EBITDA margin, reflecting M&A market volatility and lower print/distribution volume partly offset by growth in ArcSuite and ActiveDisclosure.
AI Generated. May Contain Errors.
Earnings Conference Call
Donnelley Financial Solutions Q1 2025
00:00 / 00:00

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