Welcome to the Donnelley Financial Solutions Second Quarter 2018 Results Conference Call. My name is Alan, and I will be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Sanja Burklow. Ms. Burklow, you may begin.

Thank you, Alan. Good morning, everyone, and thank you for joining Donnelley Financial Solutions Second 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 details in our annual report on Form 10-K and other filings with the SEC. Further, we will discuss non-GAAP financial information. We believe that presentation of non-GAAP results 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 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 will now turn the call over to Dan.

Thank you, Sanja, and good morning, everyone. Overall, we are pleased with our second quarter results, which were in line with our expectations and the highlight to business mix shift we discussed at our Investor Day in May. We continue to see strong double-digit revenue growth in our SaaS offerings with revenue in the quarter growing by 16.4% year-over-year. The second quarter growth in these offerings was primarily driven by ActiveDisclosure, Venue and our FundSuite Arc content management platform, each of which achieved double-digit revenue growth on a global basis. Offsetting this growth was the impact of print revenue, which declined 9.2% in the quarter. The reduction in print revenue was higher than the longer-term trend. We expect print reduction to return to the longer-term trend of down approximately 4% in the back half of the year. We continue to expect our revenue mix to evolve by drawing on our domain expertise, exceptional service and process knowledge to support our clients when, where and how they want to work in a digital world. Before I move on to our operating priorities, I’d like to discuss the sale of our Language Solutions business, which closed on July 22. This transaction was an important step in executing our strategy, aligning directly to our 5-year plan and allowing us to better focus on our global regulatory and compliance offerings. In order to support the core business and transform our brand to meet the evolving digital needs of our clients around the globe, we must focus on assets that align more closely to our vision and position the brand competitively in the marketplace. Through the process that began a year ago, we came to know the SDL management team quite well and are very pleased with how the transaction concluded. We believe SDL represents…

Thank you Dan and good morning everyone. As Dan mentioned earlier, our second quarter results were consistent with our expectations. On a consolidated basis, net sales for the second quarter were $290.6 million, an increase of $0.4 million or 0.1% from the second quarter of 2017. After adjusting for changes in foreign exchange rates, organic sales decreased 0.5% as strong Capital Markets transactional volume and growth in our SaaS offerings was more than offset by lower mutual funds volume in U.S. Investment Markets, lower transactional volume in the International segment and lower compliance volume in U.S. Capital Markets. Consistent with the shift in revenue mix that we are targeting, services revenue grew by $10.8 million or 6.1%, driven by the 16.4% growth in our SaaS offerings that Dan noted earlier. That growth was offset by a $10.4 million decline in print- based revenue. Second quarter gross margin was 43% or 215 basis points higher than the second quarter of 2017, including a $2.6 million negative impact of the change in revenue recognition standard that negatively impacted gross margin by approximately 90 basis points. Excluding the negative impact of a change in revenue recognition standard, second quarter gross margin improvement of 340 basis points was driven by favorable mix between higher- margin services and lower-margin products revenue as well as cost reduction initiatives, partially offset by increased investments in our technology function. Non-GAAP SG&A expense in the quarter was $61.6 million, $7.1 million higher than the second quarter of 2017. As a percentage of revenue, non-GAAP SG&A was 21.2% or 240 basis points higher than the second quarter of 2017. The increase in SG&A was primarily driven by higher commission expenses associated with an improved mix of higher-margin revenue as well as investments in support of our strategic priorities. Our second…

Thank you, Dave. In closing, we are well on our way in implementing our strategy and are excited by the opportunities to grow our core business. Our focus is on our clients and leading them through a digital transformation while also remaining purposeful in how we execute on our strategy. We’ll continue to be disciplined toward managing the balance sheet while investing in growth opportunities to improve our overall portfolio. And with that, let’s open up the line for Q&A.

Thank you. We will now begin the question-and-answer session [Operator Instructions] Our first question is from Charles Strauzer with CJS securities.

Hi, good morning.

Good morning, Charles.

Can we just have a quick discussion about the Investment Markets' revenue decline year-on-year. I know you’re still cycling and get some tough comps there. Maybe a little additional color and help us frame a little bit more the magnitude in the quarter from that. And then how should we think about the next two quarters? And how that should trend? Thanks.

Yes, Charlie, I’ll start. So as I mentioned, we had some work in 2017 that didn’t repeat. And then there was some additional freight and postage that goes along with the printing that was a decline, and then some timing. So I think, Dan mentioned, for the back half of the year, on the print side, we would expect a more normalized secular decline of roughly 4%. And I think, if you look at the Investment Markets trends over time, what we’ve seen is generally flattish, which is the combination of kind of that declining print, which gets offset by some of the content management that we’re doing in that space.

Yes. I’ll – the only thing I’ll add, Charlie, and then I know Tom wanted to add a few things, is we do see the content management performance, which was quite good year-to-date and in the second quarter, actually improving or accelerating into the back half of the year as well.

Yes, Charlies, so it’s Tom. The only thing I’d say anything about visibility with funds is that when they’re quite like they were in the first half of the year for different economic reasons that they side, we get to see some visibility and some, if you will, conversation around what to expect so that we can prepare for what – launching of new funds and things like that. So we’re anticipating a better back half of the year because of what we’re hearing. But we’re – and we’re hearing they want to do some things in the back half of the year. So I think, that ways into Dave’s comments as well.

That’s helpful, thank you. And then maybe you can talk, kind of segue into a little bit more on the guidance and how we should think about kind of Q3, Q4 as it breaks up for the second half of the year for topline and EBITDA. Just maybe give us give us a sense of what your thoughts are there. Thanks.

Yes, Charlie. So as we look at the back half of the year, I think, probably the best assumption is, looking at Q3 and Q4, to be of about equal size, right. So I think if you look at our year-to-go guidance, puts EBITDA in kind of the high $20 million, maybe close to $30 million per quarter. And similarly, on revenue, we would expect both quarters to be about equally sized.

Great, that’s very helpful. Thank you very much.

Our next question is from Peter Heckmann with D.A. Davidson.

Good morning, gentlemen. I wanted to follow up on your comments in the press release about share gains. And can you talk about some – we’re seeing the same thing in the data that we’re looking at. Can you talk about some of the areas where that might be most prevalent moves to us, certainly in the IPO markets that’s as well compliance, funds? What areas are you gaining share back at the best rate? And what do you attribute it to?

Yes. So I think that from a share gain perspective, most of the significant gains that we’ve seen within Capital Markets have been on the transactional side. You referenced IPO, that – the data that you have lines up with what we’re looking at. I think the – very similar situation around the S-4 mergers that we saw some nice increases there as well. And then I think Dan was going to comment.

Yes. The only other thing I’d add to that is we are seeing, as we mentioned in our prepared comments, additional wins in our ActiveDisclosure product, and the attribution of that is, we’ve been making investments behind the product and getting into the market more aggressively behind it and feel good about where we are. Obviously, we’d like to accelerate development efforts to continue to grow that offering but feel good there as well on the compliance side.

And the only thing I’d say is the quality of the IPOs. So I think in past calls, we’ve talked about the market being down, Peter. And then, now market is trending up and the quality of the deals are up as are the M&A. We like to say no two deals are created equal. So you look at the numbers for stats and percentages, but it’s not necessarily that. The valuation is also important, the type of the deal it is. And then the other thing I’d add in our Venue product is that we do a lot of private transactions in that product as well. So we’re seeing gains, both on the public markets as well as the private markets.

Okay, that’s helpful. And then as a follow- up, your – you made it clear that your guidance – your updated guidance only reflects the divesture, though the upside that we saw in margins and in EPS in the second quarter, we’re not rolling that through. Should we interpret that you’re trying to build in some additional conservatism? Or maybe are there some new offsets, some new items that come up that they look like they’ll offset some of the strength in the second quarter?

Yes, Pete. So in the back half, we obviously didn’t give quarterly guidance on Q2 but recognize the numbers that you referenced. I think as we look at the back half of the year, we mentioned the transactional pipeline is building, still the visibility on timing there remains challenged. We did have some large compliance work, compliance jobs in Capital Markets last year that were overlapping so that the comp becomes a little bit tougher within Capital Markets. And then on Investment Markets, we said the trend’s getting a little bit better.

Okay. Thanks. I will get back in the queue.

The next question is from Michael Cho with JP Morgan.

I just wanted to touch one more time on the 2018 guidance. Just want to confirm, so organic growth, adjusting for Language, well, should still be 1% to 2% for 2018. Is that what you’re guiding?

Yes, so I think our range is a little bit wider this time. And the organic comes down a little bit. Language Solutions was growing faster than our overall average of our previous guidance.

Got it, okay. Are you updating that at all today as well?

Yes, I think if you look at the – our – the midpoint of our full year guidance, it’s about 1.3%. So in the range but, like you said, a little bit lower than the midpoint of previous guidance

Okay, that’s helpful. And then just quick follow-up on the onetime revenues. So what was the actual onetime revenue in Investment Markets in 2017 second quarter?

So I think between the onetime revenue and then some of the postage in freight was about $6 million, combined. And then the rest of it was some – the normal secular decline, some timing on different pieces of work, et cetera.

Okay. And then just one more on – you said that there were some project-related revenues in the second half for Capital Markets. Can you help us, I guess, frame the magnitude of that?

Yes. So I don’t have the numbers with me, Mike. So I just want to say they were in the $5 million to $10 million range. And they were on the compliance side of Capital Markets that – they tend to – it was really proxy work that tends to kind of act more like transactional, just given the nature of that work.

Okay, great. Thank you.

Our next question is from David Ridley-Lane with Bank of America Merrill Lynch.

Sure. So a couple of questions on the Investment Markets side. It’s been four quarters of declines. And I guess I’m just curious, business reflect a broader trend among your client base. Is your client base under pressure? And is it more of a true volume decline within your clients, if that makes sense?

Yes. Sure, so let me kick it off, and thanks for the question. I think you see a – we – and we’ve mentioned this before, the larger percentage of that business is print-related. And so as you see this shift, so we’ve also had – well, we’ve had overall declines. You see a more pronounced mix shift in that business because we also have had overall growth in the software and content management product. And so you will see a more pronounced mix shift within that business. We, frankly, expect that to continue as it relates to some of the lumpiness that you see quarter in, quarter out. That really relates to largely special proxies in addition to what Dave mentioned specific to this quarter. And I’ll kick it back to Tom, but Tom referenced earlier, the nature of those special proxies are tough to call from a timing perspective. And then you do see some pressures on the funds impacting timing of some of those proxies.

Yes, I would add. Without question, the secular decline of print is in the numbers. Second, we are definitely working with – it’s kind of a plus and a minus. We’re working with our clients on – particularly, in the funds side where they want to reduce cost, and they look to print to do that. However, they still have to manage their content. So something like our arc reporting in content management, we’re seeing quarter-after-quarter increases in percentages of using the content management tools. So while it’s not the same dollar-for-dollar print revenue, it’s profitable revenue that’s replacing the print revenue. So that’s in there. Dan’s comment around the chunkiness around the special proxies, we had two mega proxy deals in the first half of last year. That makes the comps tough. And then lastly, we’re seeing new markets coming around with alternative investments, for example, which is all incremental new business using arc reporting. So it’s kind of a tale of two cities where you have the number of the print decline that you’re referencing and the customers wanting to reduce costs there, but at the same time, we’re selling them other content management products that are increasing at a different rate.

Embedded in your 2018 guidance is your view for Investment Markets to – U.S. Investment Market revenue to be growing in the second half?

No. I think it’ll be closer to flattish. If you look at the year-to-date, obviously, there’s been organic declined a lot, driven by some of the tougher comps. Closer to flat, maybe slightly decline in the back half of the year, right. And again, exhibiting the same mix shift that we talked about. So the software side will be growing and the print side will be the headwind.

Thank you very much.

Thank you.

And our final question for today comes from Bill Mastoris with Baird & Company.

Thank for slipping me in. Dan, in your prepared remarks, you referenced exploring options in the M&A market. And given some of the other comments that you’ve had, is this going to be geared towards maybe exploring more digital service-related products to make up for the decline in print revenue? Any color that you could give on that would be greatly appreciated.

Yes, sure. Thanks for the question, Bill. So we certainly look across the spectrum from things closer to what we’re doing today, things a bit further away, obviously, understand the price points, and the overall M&A market is at elevated levels from a price point perspective. But clearly, the focus of the company is towards our digital strategy so – as we can help our clients along that journey as they transition from print to digital. But we are disciplined around what that differential is in terms of price point of what those assets trade at. And so that’s, frankly, been – we’ve looked at quite a bit in the market to date. And that’s been why you haven’t seen us transact in – other than to be on the sell side, but you haven’t seen us transact. We’re discipline about what we’re going to spend for what we are going to get.

And I assume that any acquisition of any small business is not going to take you outside of your – or much outside of your targeted leverage range. Would that be a fair statement?

Yes, I didn’t talk to speculate on hypothetical acquisitions, but clearly, our targeted leverage range is a consideration and guard rail, both from size of acquisition as well as consideration and how we think about approaching the M&A market. Okay. And with that, operator, we thank you for hosting the call and thank all of those for participating. And we will talk to you after next quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. And you may now disconnect.