Welcome to the Donnelley Financial Solutions First Quarter 2018 Results Conference Call. My name is Jason, and I will be your operator. [Operator Instructions]. Also please note that this conference is being recorded. And I will now turn the call over to, Sanja Burklow. You may begin.

Thank you, Jason. Good morning, everyone, and thank you for joining Donnelly Financial Solutions First Quarter 2018 Results Conference Call. This morning, we released our earnings report, a copy of which can be found in the Investors section of our website at dfsco.com. During this call, we'll refer to forward-looking statements that are subject to uncertainty. For a complete discussion, please refer to the cautionary statement included in our earnings release and further detailed in our annual report on Form 10-K and other filings with the SEC. Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP results provides you with useful supplementary information concerning the company's ongoing operation, 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 press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. I'm joined this morning by Dan Leib, Dave Gardella, Tom Juhase and Kami Turner. I'll now turn the call over to Dan.

Thank you, Sanja. Welcome back, and good morning, everyone. As noted in this morning's press release, our first quarter results were consistent with our expectations, as is our outlook for the rest of the year. So our full-year 2018 guidance remains unchanged. Specific to our first quarter performance, I'm particularly pleased with the revenue growth in our SaaS offerings, where we continue to achieve double-digit growth as well as with our worldwide Language Solutions offering where we achieved double-digit growth in the quarter. The growth in these areas was offset by declines in print revenue, primarily related to the first quarter of 2017 special proxy volume within U.S. Investment Markets that, by its nature did not recur this year. We believe the secular reduction in print continues to be in the 4% range. The overall change in revenue mix, a heavier weighting of services versus products resulted in a gross margin increase of 130 basis points. From an overall market share perspective, we are trending flat for last year, so the decline in first quarter revenue is primarily reflection of the difficult comparison to the first quarter of 2017, where our organic growth rate was 11.9%. In aggregate, revenue from our SaaS offerings grew by 11% in the first quarter and now represents 15.2% of our total revenue. The first quarter growth in these offerings was primarily driven by ActiveDisclosure in Venue, which grew by 17.1% and 18.7%, respectively on a worldwide basis. We are pleased with the progress we continue to make in growing these recurring revenue streams. The large opportunity in front of us is to continue to drive change and evolve our business model to leverage our domain expertise, service and process knowledge to support our clients, the way they want to work as they migrate further…

Thanks, Dan, and good morning, everyone. Before I discuss our first quarter performance, I'd like to recap 2 accounting standards that we adopted during the first quarter of 2018. As of January 1st, we adopted the new revenue recognition accounting standard, using the modified retrospective approach applied the contracts that were not completed as of January 1, 2018. Prior periods continue to be reported under the accounting standards in effect for those periods. In the first quarter, this change did not have a material impact on revenue in either of our U.S. or international segments or on the consolidated results in total. There was, however, a notable impact at the U.S. reporting unit level, positively impacting U.S. capital markets revenue by approximately 580 basis points and negatively impacting U.S. Investment Markets revenue by approximately 590 basis points. As of January 1, we also adopted a new accounting standard related to retirement benefits, which resulted in the presentation of pension income within investment and other income in the statement of operations instead of in G&A expense. Pension income was also reclassified for all the prior periods reporting in the earnings release and will also be reflected this way in our 10-Q. Now I will discuss our first quarter results. As Dan mentioned earlier, we are pleased with our first quarter performance, which was our toughest quarter from a year-over-year comparison perspective as we reported 11.9% organic growth in last year's first quarter, driven by an improved environment in our U.S. capital markets offering, where we achieved 11.5% revenue growth and 2 mutual fund special proxies in our Investment Markets reporting unit where we reported 9.9% growth. On a consolidated basis, net sales for the first quarter of 2018 were $255.2 million, a decrease of $12.1 million or 4.5% from the first…

Thank you, Dave. I want to reiterate our key priorities for 2018, which are driving growth in our current offerings due to product development in sales and marketing, accelerating our innovation efforts infusing our platform with powerful emerging technologies, to provide our clients with insights and to maximize efficiencies. Investing in our employee base in order to ensure we deliver these capabilities in a comprehensive and cohesive platform, while at the same time being prudent from a cost perspective. Before we open up the lines for Q&A, I want to again remind everyone that we are hosting an Investor Day in New York on May 22, during which we will discuss the company's strategy and growth opportunities in more detail. Additional information regarding the event can be found on the Investors section of our website. We hope to see you there. And with that, let's open up the line for Q&A, please.

[Operator Instructions]. And first, we have Charles Strauzer from CJS Securities.

If we could talk a little bit about the kind of current trends in Q2 just, and also as you look at kind of top line in EBITDA for Q2, are there any kind of difficult comparisons like we had in Q1 with the proxy that we should be factoring it better.

Thanks, I will kickoff on it Charlie and then Dave and Tom can way in. From an activity level, we have seen increased transactional activity deal announcements et cetera whether those hit within Q2 or later in the years is always tough to call but it is a positive from a pipeline perspective than a general activity level. And thinking more broadly about the business, there's nothing one-time in nature that was popping up last year, certainly, there's always large deal activity that can influence a quarter, but it's not the magnitude certainly that we had 2 years ago in Q2 with large projects.

And Charlie, just to reiterate and nothing extraordinary in Q2. We talked about the ramping up of some of the investment spending, CapEx was a little bit lower than we expected in the first quarter, we will expect that to start to ramp up in Q2 along with some of the operating expense investments starting to ramp up in Q2 as well.

And some of the operating expense is going to be seen where -- mostly in SG&A?

Mostly in SG&A, yes.

Got it. And then if you look at kind of the adjusted comparisons of last year in the capital markets in the transactional side of the business, Tom maybe talk a little bit in terms of current trends on that front, are we always seeing kind of similar trends? Are we kind of flattish from that perspective or possibly could be -- maybe it's even a little bit of growth this year?

Yes, sure. So the activity levels as mentioned are increased and as we look in our -- in the chain of activity that takes place within our shop and so calling the exact quarter, those will hit is a bit tough but we're encouraged by the activity in the pipeline.

Yes, I guess with respect to Q1, Charlie, part of the impact that we saw on organic revenue decline in capital markets was really influenced by the transactional work that was down roughly $5 million or $6 million on a year-over-year basis. But as Dan said, from a momentum perspective, starting to see more activity as we get into Q2 here.

Yes. The only thing I'd add is that the dynamic in the business is filed and priced so when you think about the transactions we get. So I think there may have mentioned we increase in the number filings, but they have to price in order for them to come through our shop to get paid.

Understood. And then maybe [indiscernible] into that the competitive environment, just any updates there in terms of anymore increased competition there, particularly on the Venue side and also in the transactional side.

Yes, sure. So I'm starting with Venue. Our growth rate in the market data is not great, so we are surmising our growth rate in the 17% range. We feel like represents more than our fair share, more than the market activity, so we feel like we are taking share and that's a continuation of what we have seen over time in Venue. So we are encouraged by that and market is pretty competitive but we feel good with our positioning there. And as it relates on the transactional side, no real changes in the broad competitive dynamic. On the compliance side, we've talked about the stabilization predominantly on the software side within compliance and we did have a good first quarter. We were a net positive on customer wins there and that's building off of, I think, we talked previously that in 2016, we saw leveling off of net losses and we've seen a continued success rate in bringing customers back to the platform in the first quarter of 2018.

Next we have Michael Cho from JPMorgan.

Just a quick follow-up on what you just said around the capital markets compliance. I thought, I heard the first quarter was net positive in terms of customer wins. Can you provide a little color around that comment versus the lower compliance volumes that help drag [indiscernible].

Sure, yes. So there is a bunch of factors that impact compliance volumes within any given quarter. Some of it is actually driven by deal activity, which has associated compliance filing requirements. When we look at the competitive wins in the quarter, we break it out into direct competitive wins and also then losses that result from delistings, bankruptcies, mergers and acquisitions and so when we look on a direct win basis -- or an aggregate win basis, I should say, this was one of the stronger quarters that we have had in the past several years. It -- it's in the range of dozens of net wins on a customer basis.

Yes, Michael, one thing to add last year, there was also some larger proxy volume that we had on the capital market side that was lower revenue number this year.

And I get just one follow up I guess around that -- around the SaaS-based stock. I think maybe -- can you just give a little color on the pricing landscape as well?

Yes, I think, from a pricing perspective, we don't see a significant amount of pricing pressure from time to time as some of the contracts we knew on the investment markets side, as funds are looking to drive cost out of their own operations. We do engage in those discussions but often those discussions are actually helpful from our contract perspective as we can implement more the modules and the capabilities of the FundSuite Arc platform to kind of replace some of the internal costs that of our clients have. They outsource it to us and net-net drive some of that cost savings that they were looking to achieve without necessarily impacting the absolute pricing.

And next we have Peter Christiansen from Citi.

I was hoping that you could tie together some of the stats I guess on U.S. Capital Markets, it looks like listed IPOs were up 50% year-over-year versus last quarter. Is that a timing issue? Is it related to your business or have you seen any changes in share or competitive wins or losses?

Yes, sure. So I will start and then Dave and Tom can jump in. So then Tom referenced that, which is a priced versus filed, so a lot of the activity that we're seeing announced now dovetails with my comments of an increase in activity that would be represented in filing activity and so we track the filing activity, we track different size of IPOs as well, given that well it's not a perfectly linear relationship generally speaking, a larger IPO has more activity for us. And so what you would be seeing in terms of results would be priced IPOs that hit any given quarter, and so that's a bit over the Delta.

And Peter, just wanting to add there, you are right, the number of -- even when we talk about the number of priced IPOs in the quarter from an overall market perspective definitely increased on a year-over-year basis, as did ours. I think one of the variables that always kind of comes into play is the complexity of each of the deals, which don't always -- the increase in the number of transactions don't always perfectly correlate to the change in revenue.

Okay. And then I know you're talking about making a lot of these investments, and looking forward to the Analyst Day. Have you also considered potentially any dispositions -- disposals I'm sorry, and how do you evaluate your existing assets and I would almost segue that into your printing assets as you look at utilization capacity, do you believe you are at the right levels here for those assets?

Yes, sure. I will take the first one on the dispositions or acquisitions, and on capacity and where we sit, Dave or Tom can take that one, I think, it's a pretty similar answer what we have given in the past. Regarding dispositions and acquisitions, we certainly wouldn't comment on any thing in particular. With that said, we are always looking at the portfolio, and we're very commercially minded as we do that.

Yes, I think, kind of along those same lines in terms of looking at the portfolio or looking at the assets we own, versus what we, the production that resource on the outside -- always looking to optimize that based on some of the trends that we're seeing for particular capabilities within the print market or the overall demand. But nothing to disclose at this point.

Okay. And last one for me is you've mentioned that you have this pretty strict discipline towards looking at how you are thinking about ongoing investments in the business. Can you just broadly touch upon some of the criteria that is guiding you as you look to make these investments?

Yes, sure. Let me start and then Dave can get into some of the specific criteria. Just from a process perspective, we -- and it will be probably easier to go through at the Investor Day, but we look for a series of investments that span across time and obviously, those investments that are further afield we're seeding and spending less money on them and the things that are closer and have a more certain return is where we feel comfortable adding more capital. It's done in a Stage-Gate process so we're willing to fund some early investments and then get a view of whether or not we should shut the investment off or accelerate it. So pretty standard Stage-Gate process, Dave can speak to some of the specific criteria, and then as you would expect, obviously, we're looking for how each of these investments may impact the business holistically.

Yes, so and I guess from an overall return perspective, we'd be looking to generate something in the, call it, mid-to high teens, obviously, depending on the execution risk there. We're implementing kind of post execution audits, the performance relative to the business plan and again, it's all around, as Dan pointed out, kind of these seed investments that we're exploring and then building out a stronger business case based on what we're finding, driving long-term profitable growth. And as I mentioned in Q1, we spent less CapEx than we expected, not that we didn't have a long list of ideas, we just didn't have a long list of ideas that met the criteria that we're looking for. So we're not going to spend the dollars just because we have an estimate out there. We are going to maintain that same disciplined approach around all of the capital deployment and cost structure.

Yes, which was actually consistent with what we saw in 2017 where our capital investment came in lower than the guidance we had given and that was just a function of the Dave's point. The right ideas with the justified return and the right -- bringing in the right level of talent to complete some of those projects.

Next we have David Ridley Lane from Bank of America Merrill Lynch.

I just had a question on CapEx. You maybe highlighted 1 or 2 things that are driving the step up in CapEx in 2018 and then would you expect CapEx to fall back down to 2.5% or 3% of revenue area in 2019?

Yes, so thanks for the question. So this year's guidance of $40 million to $45 million is primarily around -- the incremental is primarily around kind of the ramp up in the technology and innovation areas that a lot of which Dan talked about in his prepared remarks. We'll give longer-term guidance on that CapEx at the Investor Day, but the way we're viewing it now is that it ramps down over the next few years, probably closer to the $35 million range. But we would expect the $40 million to $45 million this year and then ramping down over the next few years back towards a $35 million number.

Yes, then a couple of things that obviously, influence that over time are M&A environment and so there's opportunity there. The M&A that may cause CapEx to be lower et cetera.

Understood. And then any potential disruption around the Intralinks acquisition by a private equity firm?

Yes, so as we talked broadly about Venue and it's a competitive environment, we do feel like with our 17-plus percent growth that we have been a net share taker. They're not the only ones in that market. We think we have a number of differentiating characteristics of our Venue Data Room, the eBrevia investment that we have and the analytics that, that tool allows, is one of them. There are others as well. So we respect all of our competitors. We do feel like we've taken some share and sometimes tough to tell exactly where it's coming from.

Understood. And then on the -- just another quick numbers question on the adoption of the new revenue recognition standard. Should we expect the relative impact in first quarter to hold through for the next 3 quarters until you anniversary this or did you see an outsized impact in the first quarter?

So yes, there was an outsized impact in the first quarter as I mentioned earlier, on a consolidated basis, didn't have much of an impact, but certainly swings between capital markets and Investment Markets. We would expect some of that to reverse probably in Q2, just given the seasonality and then on a full-year basis, it should be close to net 0 impact. But we should see some of that reverse between Capital Markets and Investment Markets in the second quarter.

And our final question comes from Bill Mastoris from Baird and Company.

I'd like to circle back to Dan, one of the remarks that you made a little bit earlier about capital allocation, would it be fair to assume that absent any type of acquisition that all free cash flow is going to be applied towards debt reduction to get back into the targeted leverage range?

Yes, so, I think, as you saw what we did in 2017, where the free cash was all directed towards debt repayment in the absence of M&A, that would certainly be the preferred place to put the cash.

Okay, and in the event that you were to find the ideal acquisition, how far are you willing to stretch that balance sheet?

Yes, sure. So, I think, we've talked through this on previous calls. So we have our guidance target of $225 million to $275 million and as were the same folks from -- that came from R. R. Donnelley and had a guidance target that we operated within, and we take that seriously. We guardrail our M&A activity by that and that included at times using equity as consideration. So we're very mindful of the balance sheet, we're also mindful that in a business that has some aspect that is cyclical in nature that a point in time estimate of what leverage looks like in 1 cycle or 1 part of the cycle, I should say, may look very different in another part of the cycle. So we take a thoughtful approach about it. I'm not going to throw a number out there, a lot of what would determine comfort with leverage in range is a mix of asset, right? And so it's tough to answer it in a number other than to talk about what our intention and direction is, and I think our leverage targets provide that for you.

Okay, then moving towards a more administrative question. Dave, what was the covenant that caused the deduction in the availability under the revolving credit facility?

Yes, the gross leverage target -- the gross leverage covenant. So if we would've borrowed more than the $211 million on the revolver that we would be kind of hitting that threshold average.

Thank you, and very last question, and that is would it be safe to assume that the free cash flow that is devoted towards debt reduction is all going to be on the term loan?

Yes. So there are two points Bill, $20 million on the revolver at this point. The bonds are nonfiled for another, I think, 3.5 years or so.

We did have an additional question from Bill Warmington from Wells Fargo.

So a couple of quick ones for you. So what was the dollar contribution in first quarter '17 from the nonrecurring special proxy Investment Markets revenue?

Bill, I think it was in the $15 million to $20 million range between the 2 proxies in terms of overall revenue. And again, most of that is print related revenue.

Got it. And then what's the client feedback then like on the new product features you have been investing in?

Yes, sure. We have quite a few I think in the nutshell, clients have been happy with what we are putting together. We are not putting together an isolation, we are engaging with our clients and obviously, understand the regulatory requirements, given where we sit. So we've had a lot of very positive feedback. I referenced the data ingestions well in my comments. I referenced a couple of the projects going on in capital markets and also obviously, N-CEN, N-PORT, which is coming. And universally, we feel good about where we are from a development standpoint and the feedback has been positive.

And then last one.

Sorry, going back, I think I gave you a bad number on the proxy, it was closer to $10 million.

$10 million, okay. And then last one here if I could get the percentage of total revenue that's now SaaS-based?

Yes. it's about 15%.

1-5?

1-5 and just to clarify that number, that's a software number there. There's potentially more from a service content but been tough to manage -- tough to measure rather.

Okay, with that, thank you all for joining the call and we look forward to seeing you on May 22 in the Investor Day. Thank you again for your time.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.