Ladies and gentlemen thank you for standing by and welcome to the Donnelley Financial Solutions' Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today Mike Zhao, Head of Investor Relations. Thank you. Please go ahead sir.

Thank you. Good morning everyone and thank you for joining Donnelley Financial Solutions' second quarter 2021 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 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-K, quarterly report on Form 10-Q, and other filings with the SEC. Further, we will discuss non-GAAP financial information. 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. This morning I am joined by Dan Leib, Dave Gardella, Craig Clay, Eric Johnson, Floyd Strimling, and Kami Turner. I will now turn the call over to Dan.

Thank you, Mike and welcome to your first earnings call at DFIN. Mike recently joined DFIN from Teradata, an enterprise SaaS company where he led finance for one of their go-to-market segments. At DFIN, Mike is heading up Financial Planning and Analysis as well as Investor Relations working closely with Dave. We look forward to you meeting Mike. Good morning everyone. And from all of us at DFIN, we hope that you and your families are staying safe and healthy. After a very strong start to the year in the first quarter, I am again pleased with the momentum in our second quarter operating performance as well as within our end markets. On our last few quarterly calls, we noted that we had been seeing a return to a more normalized level of growth in software sales and a significant increase in transactional activity. The momentum in software sales accelerated in the second quarter, while the transactional environment within capital markets remained strong. Our second quarter results offer another proof point of the success of DFIN's transformation and our 44 in 2024 strategy, specifically targeting 44% of our sales from software solutions by the year 2024 and more importantly, the resulting financial profile from such a business mix. Two of the resulting financial aspects are an increase in profitability and an increase in margin. Over the same two-year period, adjusted EBITDA has been up by over $100 million driving margin up 1,000 basis points to 25%. At quarter end, our trailing four-quarter adjusted EBITDA is $233.5 million. In short, our strategy is delivering strong results. We look forward to sharing ongoing progress with you as we execute our strategy. As it relates specifically to the second quarter results, total sales grew 5.3% from last year's second quarter. Excluding print and…

Thank you Dan and good morning everyone. As Dan noted, we delivered very strong results in the quarter including 5.3% sales growth and significant year-over-year increases in non-GAAP adjusted EBITDA, adjusted EBITDA margin, non-GAAP adjusted earnings per share and free cash flow. We maintained strong market share in our transactional filing business and posted 40% growth in our software solution sales, all while continuing to drive operating efficiencies. On a consolidated basis net sales for the quarter were $267.5 million an increase of $13.5 million or 5.3% from the second quarter of 2020. Software solutions net sales in the second quarter increased by $19 million or 39.9%, primarily due to an acceleration of virtual data room activity in Venue, driven by the improved M&A environment, accelerated product adoption within Arc Suite, as well as solid subscription growth in ActiveDisclosure. Tech-enabled services net sales increased by $18.6 million or 16.1% primarily due to increased capital markets transactional activity. Print and distribution revenue decreased by $24.1 million or 26.5% primarily due to the regulatory-driven reduction in demand for printed materials within investment companies and less commercial printing where we have proactively exited certain low-margin contracts. This decline was partially offset by higher print-related sales as a result of the increased transactional activity within capital markets. Regarding our print platform, we have made substantial changes over the past couple of years. By year-end 2021, we expect to be utilizing our third-party network for approximately 85% to 95% of our print needs variablizing the cost structure for the majority of our print production and at the same time operating our own digital-only print platform to meet the demand for higher-value quick-turn requirements. Second quarter non-GAAP gross margin was 56% approximately 970 basis points higher than the second quarter of 2020, primarily driven by a…

Thanks, Dave. The execution of our strategy continues to deliver positive results. Our new software offerings continue to attract strong interest and adoption. The momentum in software combined with our strong position in the transactional market has enabled us to generate sustained sales growth over the last four quarters. In addition, we have now delivered year-over-year expansion in EBITDA margins for eight consecutive quarters demonstrating the continued improvement in our business mix and disciplined cost management, while also increasing investments to accelerate our strategy. The trends in our top and bottom line results reinforce the value of our 44 in 2024 strategy. Achieving this goal was driven by increases in our software solutions and tech-enabled services sales and decreases in print sales yielding strong margins and cash generation. In closing, we're excited about our very strong first half of the year and remain keenly focused on driving our 44 in 2024 strategy. The adoption trends for our new software products and our various operational successes illustrate the exceptional value we are delivering to our clients. We continue to find and focus on opportunities to further enhance shareholder returns. Before we open it up for Q&A, I'd like to thank the DFIN employees around the world, who have been working tirelessly to develop new products maintain our operations and ensure our clients continue to receive the highest quality service without disruption. Stay safe and healthy. Now with that, operator we're ready for questions.

And your first question comes from Charlie Strauzer with CJS.

Hi. Good morning. Just a couple of quick questions for you. First of all, the impressive software growth that you saw in the quarter maybe can you dive in a little bit more detail behind the drivers of that growth? Especially, excluding Venue what are you seeing in terms of the drivers beyond that? And are you seeing a pickup in kind of De-SPAC activity leading to new business as well?

Okay. Thanks, Charlie. Good morning. I'll start off, and then I'll ask Craig and Eric to speak a bit about the go-to-market on some of the new products that our engineering and product teams have recently developed and that we have in market. So if you look at our $232 million of software revenue over the past four quarters, we break it into our regulatory compliance offering, which is the majority of our software it's purpose built for our clients to comply with SEC regulatory and filing requirements, and then to your other point the balance is primarily our Venue Data Room. And so we're always looking for ways to serve clients to increase the recurring nature, across all of our products. We have increased our spending on technology both existing and new products, including introducing three new offerings to the market over the past year or so, and we're seeing great client interest and receptivity across the product suite, but in particular to the new products. The most recent introduction is new AD, which is a brand-new build. We began to sell it in the market a few months ago. And then within our GIC business, we introduced the new product total compliance management to support our clients in response with all the regulatory change going on with 30e-3, 498A and then even more broadly. We also introduced a new offering in Europe a year or so ago. So let me pass it off to Craig. We will then also ask Eric to make a couple of comments. Craig, anything to add on new AD?

Sure. And I think also to touch on the SPAC piece, maybe I'll start there which is SPACs have normalized, so post the sort of SEC scrutiny, what we've seen is really in Q2 net total SPAC count surpasses 2019's total. So it certainly isn't at Q1 level, but we think it's normalized. And it's a great opportunity that SPACs are creating increased public companies and it really perfectly highlights DFIN's value proposition. We're supporting the deal team through the traditional and new AD for the filings and the pricing. Our clients are using Venue, our virtual data room for their pipe financing. And then as well, you've got this pipeline. So 400 SPACs plus looking for a target, and we're ready to support them. So then you get to it's creating these great new public companies. And the recurring high-retention software of new AD, we took the experience of decades of servicing SEC clients. In Q1, we launched new AD, so built from the ground up. It's purpose-driven SEC-compliant software, browser-based. It integrates with our client's ERP and Excel where our clients last mile of financials reside. Simple fast onboarding and early client takeaways from those who've onboarded indicate the market wants what we have built. We're very, very pleased with the pipeline. Our clients are converting from AD 3.0 to new AD. Our newly public clients through IPO or SPAC are on new AD. And certainly, our competitive wins, our competitor clients are welcoming having a choice at DFIN. So we're really excited about what we see with new AD and we're looking forward to the second half of 2021 and beyond. Eric, I'll turn it to you.

Yes. Thanks, Craig. And Charlie thanks for the question. For GIC, it's a few things. We've seen strong performance from our new ArcDigital product and total compliance management solution launched in 2020, as well as new regulatory compliance drivers in the US market like iXBRL rules 30e-3 and 498A. Our Arc Suite software helps clients operationalize reg requirements. Another important factor is the velocity of technology adoption in the Investment Companies segment, as many firms are focused on digitizing their internal processes and workflows, supporting the middle and back office. And Arc Suite is well positioned to help them achieve their digitization goals.

Great. Thank you, very much for that. And then, just kind of staying on that topic for just a second if we could, how much exactly are...

Charlie, sorry, sorry, I was just going to add your question on the SPAC market. Craig outlined kind of the opportunity going forward. I commented on the math and what we've seen historically the 139 SPACS that we've done for -- under registration about $6.2 million in revenue over the last year, and then my comment around the De-SPAC transaction being typically 10 times larger. If you run through that math, there's roughly 425 SPACS that have completed the registration, but have yet to complete an acquisition. So you look at the aggregate revenue opportunity in the market, it's probably, call it $200 million over the next couple of years. And then even if you haircut that for completion rates and our market share, our historical market share of the M&A activity, think about that as $60 million to $70 million of transactional activity over the next couple of years isn't unreasonable specific to SPAC or De-SPAC transactions. And then, as Craig also noted, more importantly, it's creating a nice pipeline for us on the recurring software subscriptions for ActiveDisclosure.

Great. And then just staying on that for just one more second, just if you think about the companies that have begun to De-SPAC, what do you feel like your share has been in terms of garnering new business from those De-SPAC-ing companies?

Yes. I'll take it for a shot at that. So thank you. Our share has been increasing. So certainly from the evolving SPAC, I mean it used to be sort of the blank check last resort, now it's a high-quality high management team doing great things. Our share has started to reflect that. So we certainly have an extremely high retention of the De-SPAC from the SPAC of our own work. And then what we're also seeing is that, these De-SPACs are super, super complicated and we can then, in those De-SPAC, actually take share from our competitor. They often upgrade their deal team and they often then upgrade to DFIN. But the real takeaway is this creation of new public companies, the SPAC holding company, the SPAC and De-SPAC-ing, it's creating an amazing pipeline for us to retain those companies on new AD and create this recurring revenue. Super excited about not just the revenue, but the ongoing reporting needs of these clients and that they will be here at DFIN.

And Charlie just to add to Chris's comments on those -- the SPAC registration where that company has also done an acquisition and it was -- or where the initial SPAC was handled by a competitor, we've taken back roughly 20% or so on the De-SPAC transaction. And then as Craig pointed out very high conversion rate where we don't -- where we did the initial SPAC transaction.

Do you feel like…

Further context the SPAC as I think we've referenced on prior calls, really a small document. So it is with De-SPAC that the real disclosure opportunity, and then obviously the real reporting opportunity. Charlie back to you.

Great. And just on the share side, just on the traditional side of your business, do you feel like you're still taking share from competitors as well?

Yes. We're in a strong position across an array of product lines yes.

Excellent. Thank you very much.

Thank you Charlie.

Your next question comes from Pete Heckmann with D.A. Davidson.

Hey. Good morning, everyone. Great results. On that last question on market share gains, on the capital market side, do you feel like those share gains are more weighted towards just capturing a greater share of the new issues, or there's also a contribution from competitive takeaways of existing public companies?

Well, I think they are both. So if you think the transactional side is really your first question. In robust markets, we tend to do very well about the quality of those deals, the deal teams, our place in that nexus of compliance and regulatory. We do really well on the transactional side and we're seeing that right now. The second part of your question is on the compliance side, which is the ongoing reporting needs. We've said on prior calls that we have increased share. We did that in 2020 from 2019. We did it in Q1 from 2020 and we saw that again. So we continue to increase the number of public companies working with us. It's both taking share as well as retaining company’s newly minted companies whether it's IPO or De-SPAC.

Got it, got it. Okay. And then just on the regulatory outlook. It's good to see 30e-3 and 498 almost in the rearview mirror. Anything that we should be watching over the next let's say 18 months in terms of proposed new rules that could either be a tailwind or a headwind for DFIN?

Yeah, I'll start it out. We monitor what's happening with the SEC very closely. They were in a modernization process. We're in very closely making sure that our products. for example, on the call today are making sure that our products are ready for that and we are. I think it's an opportunity for us. There's certainly nothing that we see as a net negative. They're talking about ESG. They're talking about traditional iXBRL requirements. So we're monitoring those. And none of those have been proposed. So there typically is a proposal like 90 to many months long process to comment before there's a rule change. So we're certainly very far out for anything that would have any substantive change. What we hear, I think is a net positive as people have to disclose and report more. Transparency is great.

Yeah. I'd add to that. I think when you ask relative to 18 months tough to exactly pinpoint the timing, but Craig's last comment about enhanced transparency disclosure tagging of data, we feel very positive about some of the things that have been discussed and that are being discussed but not yet proposed. And I'm sorry, Eric, I think you had a couple of things to say.

Yes. Thanks Dan. And Pete thanks for the question. I would just say on the GIC side of things as Craig mentioned, we as well stay very close with the regulators. And we see our software, as I mentioned earlier, it's about operationalizing the reg requirements. So we stay very close with US regulators as well as EU. As far as the near horizon, certainly there's a lot of things in comment period, and we'll stay close to it. But again, our software is set to really help our clients tackle any regulatory change that comes their way.

Got it. That’s helpful. I’ll go back in queue.

Thank you.

Your next question comes from Raj Sharma with B. Riley.

Hi. Good morning, guys. Congratulations on another solid quarter.

Hi. Thanks Raj.

Sure. I wanted to understand the print declines a little bit better. I -- was some of the decline moved from Q2 to the second half of the year? It's my recollection. I thought that there was going to be sort of a bigger proactive decline in Q2 of print. And so what is remaining for the balance of the year? Could you talk about that?

Yes. Raj, it's Dave. So, when you look at the overall print numbers, there's a couple of things going on there. One is the impact of the regulatory change, right, which was 30e-3 and 498A that $130 million or so. We're about 60% of the way through that. Now you have a couple of things going the other way. We pointed this quarter specifically the transactional environment and Capital Markets remain strong. And so there was some incremental print on a year-over-year basis reflected in the numbers too. So, I think when you look at going forward on that $130 million of print decline this year, we said we're roughly 60% of the way through it. And so, that last 40% or roughly $50 million over the next couple of quarters.

Got it.

Yes. And I -- just to add to that is some of that variability outside of the regulatory change does demonstrate the benefit of variablizing the print platform as we've done. And so, to Dave's prepared comments, we now have a very nice digital platform for higher-value, quicker turn, types of needs. And then, we're able to go into the marketplace to scale up and obviously scale down as demand dictates.

So, is it fair to say that the net reduction in print this year would be -- could these actually looking to be less than the $130 million, simply because of the uptake in transactions?

Yes. That's the right way to think about it Raj.

Okay. Thank you. And then, on your Q3 guidance, any particular reason why the margins would -- you're expecting the EBITDA margins to be 500, 600 basis points lower. Is that right than Q2?

So, it's -- we said, low to mid-20s similar to last year's Q3. Again, I think when you look at the way transactional has gone over the last several quarters, we've had $90 million plus I think now for at least three quarters in a row. While the market remains strong in July, Q3 always tends to be a little bit lighter, and so that business mix is always an issue we're watching. And like we've talked about before the transactional work is a little unpredictable, although we're still bullish on the outlook, but I want to just make sure that we're going to deliver against our guidance.

Right. So, it's fair to say that the margins are almost entirely predicated upon the transaction part of the business and -- which is the wildcard sort of. But do you see a good strength in that in Q3 so far?

Yeah. So far, we do. I would say the other aspect is the growth that we drive on the software solutions revenue comes through at very high incremental gross margins and flows through to EBITDA. But like you said, the biggest wildcard would certainly be transactional.

Thank you for answering my questions. Great quarter again.

Thanks, Raj.

Your next question is a follow-up from Charlie Strauzer with CJS.

Thanks. Just drilling down a little bit more on the Q3 guidance Dave if you could. Maybe some thoughts on your assumptions for each segment. How should we think about building out the model from a segment basis there? And then picking up on the transactional side, what are you assuming for transactions for both like IPOs as well as M&A? Obviously, M&A has been very big seeing a very big pickup lately. Can you maybe give us some thoughts on that side as well.

Yeah, sure. So if I go segment by segment, we really would expect both of the software segments to continue to increase pretty substantially in Q3. And then when we look at the Investment Companies - Compliance & Communications Management segment to the earlier point around the regulatory impact on print, I think the declines there would be similar to what we've seen so far this year. And then again, the biggest wild card would be in the Capital Markets Compliance & Communications Management segment. Certainly, expecting to see growth in Q3. The comps do get tougher as we get into Q3 and also into Q4. But at a high level, I think the growth in software, the growth in Capital Markets, Compliance & Communications Management and again a little bit of that offset by the decline in print which predominantly hits in Investment Companies Compliance & Communications Management. And then specific to transactional for Q3, I mentioned that you look over the last three or four quarters we had -- it's actually the last three quarters starting in Q4 last year and the first two quarters of this year in excess of $90 million in transactional sales. That's a pretty big number a pretty robust market there that we've seen over the last three quarters. I think looking specific at transaction that would be a stretch to get there this quarter. But like I said, we've started off strong in July. And to the extent that the market holds up, we'd probably be looking in the call it $80 million to $90 million range on transactional.

Right. And obviously, you got -- you should see traditional kind of tail down for the summer vacation doldrums so to speak too.

Yeah, that's right.

Great. Thank you very much.

Thank you.

At this time, there are no further questions. I will now hand the call back to management for closing remarks.

Great. Thank you, Ashley. Thank you all for joining us and we look forward to speaking to you in November. Thank you.

That concludes today's conference. Thank you for your participation. You may now disconnect.