Good morning. My name is Joseph and I'll be your conference operator today. At this time, I would like to welcome everyone to the Donnelley Financial Solutions Second Quarter 2022 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. Thank you. Mr. Mike Zhao, Head of Investor Relations, you may begin your conference.

Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions second quarter 2022 results conference call. This morning, we released our earnings reports, supplemental trending schedule of historical results. Copies of which can be found in the investor 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 detailed in our most recent quarterly report on Form 10-Q and other filings with the SEC. Further, we will discuss certain non-GAAP financial information such as adjusted EBITDA and adjusted EBITDA margin. We believe the presentation of non-GAAP financial information provides you with useful supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the earnings release and related tables for GAAP financial information and reconciliations of GAAP to non-GAAP financial information. I am joined this morning by Dan Leib, Dave Gardella, Craig Clay, Eric Johnson, Floyd Strimling, and Kami Turner. I will now turn the call over to Dan.

Thank you, Mike. Good morning everyone and from all of us at DFIN, we hope that you and your families are doing well. We're extremely pleased with the company's performance during the quarter, especially in light of the continuing macroeconomic headwinds, current geopolitical unrest, and related market volatility. In this difficult operating environment, we delivered excellent second quarter results, including positive constant currency year-over-year revenue growth, record quarterly adjusted EBITDA, year-over-year adjusted EBITDA margin expansion, and increases in both operating cash flow and free cash flow. Our second quarter performance serves as further proof that our strategic transformation is resulting in DFIN becoming fundamentally and sustainably more profitable, enabling us to deliver a much higher level of profitability compared to historical periods of similar revenue size. I'm also pleased with the solid progress we have made against a number of the operating objectives that underpin our updated long-term plan that we communicated on our last earnings call. First, during the second quarter, we made continuing progress in transforming DFIN into a software-centric company. Total software sales grew nearly 8% versus the second quarter of 2021 and made up 26.9% of total second quarter net sales, an increase of approximately 200 basis points from last year second quarter sales mix. As a reminder, the second quarter, largely due to the proxy season, historically represents a seasonal low for software as a percentage of revenue. On a trailing four-quarter basis, software sales reached $285 million growing 23% from the second quarter 2021 trailing four quarters and represented 30% of total sales in that period, an increase of approximately 480 basis points from the second quarter 2021 trailing four-quarter period. This continued positive mixed shift positions as well to exceed our 44 in 2024 goals, that is deriving 44% of our sales from…

Thanks Dan and good morning, everyone. As Dan noted, we delivered very strong second quarter results in a challenging environment. The quarter featured consolidated year-over-year constant currency revenue growth, higher adjusted EBITDA, and adjusted EBIT margin, and increases in both operating cash flow and free cash flow from last year second quarter. By continuing to focus on operating efficiencies, while also improving our sales mix, specifically more software and less print sales, we improve second quarter adjusted EBITDA margin by approximately 110 basis points compared to the second quarter of 2021. Our second quarter results provide additional positive proof points that our strategy is working, allowing us to deliver outstanding results, while also continuing to invest in evolving to a more recurring sales mix, aggressively managing our cost structure, and being disciplined stewards of capital. On a consolidated basis, net sales for the second quarter of 2022 were $266.2 million, a decrease of $1.3 million or 0.5% from the second quarter of 2021. The negative impact of foreign exchange rates was $2.1 million, accounting for more than all of the year-over-year sales decline. On a constant currency basis, second quarter net sales increased 0.3% versus the second quarter of 2021. Software solutions net sales for the second quarter were $71.6 million, an increase of $5 million for 7.5%. Our recurring compliance offerings, which include active disclosure and Arc Suite delivered 13% sales growth in aggregate. ActiveDisclosure continued to demonstrate strong sales momentum, growing approximately 20% in the quarter, and Arc Suite net sales grew 11% in the quarter, driven by subscription revenue growth. Tech-enabled services net sales were $133.3 million, a decrease of $0.7 million or 0.5% due to decreased Capital Markets transactional activity, which was almost entirely offset by higher Compliance volume within Capital Markets and growth in investment…

Thanks Dave. Our performance in the second quarter of 2022 provides us with strong momentum to continue to execute DFIN's strategic transformation. While the macroeconomic outlook remains uncertain, the combination of our market position, cost structure, and strong balance sheet positions as well heading into the back half of the year. 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 ensure our clients continue to receive the highest quality solutions. Stay safe and healthy. With that, operator, we're ready for questions.

Your first question comes from the line of Charles Strauzer. Your line is open.

Hi good morning.

Good morning Charlie.

If we can talk a little bit about the compliance-related sales, you had really outstanding growth there year-over-year. Maybe drill down on the give us a little bit more colors to what drove that with a lot of kind of one time work? Or is this -- do you think it's more sustainable than you had first thought? And if it is more sustainable, it would appear that Q3 guidance may be a tad conservative. Can you comment on that?

Yes, Charlie, it's Dave, I'll comment on it. So the, -- as you pointed out the traditional compliance offerings saw really nice growth. I noted in the prepared remarks that was really driven by higher customer counts, market share gains and some price increases around the additional services that we provide there. I think when you look at Q2, it's the highest quarter for compliance in both of the segments, driven by proxy and all the work that goes around there. I think specific to Q3 guidance, the year-over-year -- really tough comp more on the transactional side last year, and -- again, I mentioned this last year, we did $114 million of transactional in Q3. I think as we look at what we've done so far in the first two quarters this year, just over $50 million in Q1 transactional revenue, about $74 million this quarter, we're assuming somewhere similar to the Q2 level. And that's really what brings that Q3 guidance to where it is just the tougher year-over-year comp, and the fact that transactional revenue -- sorry, that compliance revenue that you noted, those are sustainable and ongoing recurring. But again, that level is elevated in Q2 driven by proxy.

This is Craig. We're at the center of our clients regulatory compliance and governance needs and I think the CNCM compliance results in the quarter demonstrate that. And as you heard from Dan, we're supporting clients in any way that they want to work. And really, our domain expertise, our relationships in the capital market are driving this recurring revenue. Our clients are viewing us as an extension of their team. So, whether that's in proxy or human capital disclosure, or the VSU mandate, as reviewed on the call, compliance up 31%, as Dave said, it's driven primarily by 10-K, and 10-Q volume. So, share gains and 10-K, 27% is a result of public company growth and SPAC, who are utilizing our traditional platform for our customer count is up 11% for 10-K. For proxies, it's up 27%. So, just a really nice performance there. In the from 2021, so with a win, the number of public companies working here has increased, the retention on that business is high. So, it's going to be stable. It's going to be less year-over-year growth in 2023 given the current IPO market, but we're increasing our share of SEC compliance filings after many years of declines. We're going to keep executing on our plan in 2022 and beyond. We're in a really great competitive position, as we're focused on how performing regardless of the market.

That's very helpful.

And Charlie, I would just add, this is Eric Johnson. I would just add from the investment companies perspective, what we're seeing is our clients really rely on the GIC team to help them manage their complaints process on a monthly -- weekly basis. So, what we're seeing is, the driver of revenue for us is our tech-enabled solutions, as well as our services teams. As our teams manage the creation through the filing as well as the web posting and e-delivery of this compliance work. So, that's been a big driver for us.

Excellent. Thanks for all that color. That's really helpful. And shifting a little bit to the Capital Market software side, growth was about 5% year-over-year, but lower sequentially. Can you maybe expand a little bit more on that?

Yes. So, I'll kick off and then -- excuse me, it's Dan, if anyone wants to jump in. But if you disaggregate that, the -- it's really the mix impact of Venue whose primary use case is M&A. So, Venue grew or was flat grew about 2% on a constant currency basis. And then what was extremely positive and continues to be was the performance in our compliance software within Capital Markets. So, the new ActiveDisclosure subscriptions grew 25% year-over-year, so really happy about the reception that that's receiving in the market. And then also as we're converting clients over, as I mentioned in my comments, we're seeing good price uplift and better longer term on the contracts.

Great. Thank you very much. I'll jump back in queue.

Thank you, Charlie.

Your next question comes from Pete Heckmann. Your line is open.

Good morning, everyone. And really nice to…

Good morning, Pete.

…follow on to Charlie's question and just try and dig in a little bit more on that the upside, or the offset and compliance revenue, you're really pretty big number 76 million, certainly bigger than any quarter we've seen in the last three years. And I just want to -- it sounds as if you're doing perhaps more services around annual meetings or proxies? And is that correct? Would it be more tech-enabled services, print or software? And then would you given your guidance for the third quarter doesn't show repeat of that? Is that largely going to be seasonal revenue confined to the second quarter?

I'm sure, I can lead off. So thanks for question. It is primarily seasonal, because you have a mix of the K proxy, then you have one Q peak, the May, in essence May timeframe, a few. So there is some seasonality baked on them, and then you're correct. We're providing software, which will show up obviously, in the new ID numbers that Dan just recalled, as well as managed solutions, which I'm going to side around a conditional platform. It's around our proxy or creative services, it's around ESG. It's around the reports that we're providing for our clients from an ESG perspective, really excited by the fact sheet that we're producing, so all of that's rolling into this traditional compliance role. It is based on us retaining our clients from the prior IPOs back market, moving that into 2022, delivering increased client count, increased share, again, a higher retention rate. So as you look at the forward quarters, that retention is going to be primarily accused until you get to 2023. When we accept -- expect to retain it, certainly the growth of IPOs is going to suppress the growth yet again in 2023.

Okay. And then within investment company, it doesn't appear entirely material, I guess, but a modest uptick in transactional revenue. Would that reflect some like fund proxy projects on the print side?

Yes. Hey, Pete, this is Eric Johnson. And thanks for the question. Yes, that certainly proxy activity, as well as transactional work like closed end funds that are transactional in nature. So we had a nice mix in the quarter.

Okay. Great. I'll get back to the queue. Appreciate it.

You bet, Pete.

Your next question comes from Charles Strauzer.

Hi. Yes. Another couple follow-ups here. Looking at the EBITDA margins, obviously, were meaningfully better than your guidance for Q2. And again, close to what margins should look like in the back half of the year, if you need some of the mix kind of really more favorable than just perhaps the mid 20 that you're guiding to?

Yes, Charlie. So I think, certainly for Q2, a lot of that relative to our guidance was driven by a little bit better transactional revenue than our guidance implied. So you see that both on the revenue line, as well as the margin line there. And also, as you know Q2 is typically our seasonal largest quarter. So we get the operating leverage there. And when you look at the mid 20 margin, relative to what we did in Q1, on similar size revenue, I think we delivered 24% margin in Q1. And so when you take away the impact of the operating leverage on a similar sales mix, we think mid-20s is a pretty reasonable estimate.

Yes. It makes sense. Thank you. And then just the lastly, just any concern over the underperformance of companies that have siege SPAC recently, some of the pressures on some of these companies once they start trading under the new banner, so to speak, seems to be weighing heavily on the SPAC market for just not only monitoring these guys, but also finding combinations and getting them consummated?

Sure. This is Craig Clay. I'll take that. In SPAC IPOs have historically made up a small percentage of our transactional revenue for the bigger opportunity for us has been the SPAC. And in honestly, in 2022, they've held up better given the year-over-year comparison. It's also an opportunity for DFIN because in the De-SPAC, many that had been announced. And there's over 100, that had been announced. Many few that have completed, fewer have completed, but there tend to be the larger De-SPAC which trends towards DFIN. As you heard in the prepared remarks, our kind of sweet spot are these larger deal, the larger, more complicated working groups that have been on these De-SPAC have meant that we've really been able to increase our share in this space, even year-over-year, based on the mix of deals that's within that. So very correct, De-SPAC the initial filings almost de minimis 600 SPAC looking for a target. There still is an opportunity with that population, as well as the 100 that had been announced. We're certainly closely monitoring the SEC SPAC attention. We support transparency. And we think it is significant to formalize with its house SPAC play in the capital market. And it's going to continue to be an opportunity for DFIN, as we support our clients, we think the SPAC formations will reset to a less manic pace. But certainly be above the long-term average, which prior to 2020 that weren't a lot of -- I mean all of either are software platforms. So it's just a nice ecosystem.

Great. Thank you for that.

Thank you. Your next question comes from Raj Sharma. And your line is open.

Thank you guys at an excellent quarter. I wanted to understand, so what seems to have caused the significant outperformance in Q2 is the transactions have done better? The transactional business has done better than the overall industry and wanted to understand that what caused that beat? Also, the other big reason is better than expected compliance related that you seem to be gaining share in, do you not expect that to continue in Q3 and Q4 the share gain impact, because the guidance seems very conservative relative to the outperformance you've seen in Q2?

Yes, Thank you, Raj. So a couple things on your the first question on transaction. So it's a couple of things, the overall market as in some of the stats that we quoted are our unit based. And so we do see clients continuing to do work, as – and even though deals aren't closing, we're still getting compensated recognizing some revenue for that work. And importantly, as I mentioned, those statistics are unit based, we find ourselves very well positioned as we've always been. And then we've been we were very successful in winning the more complex in the larger deals. And so those for measuring share on units and then seeing the flow through coming dollars. So we saw some pick up there. On the compliance side, last year is exceptionally strong IPO market. And yes, IPO market, I was going to say, SPAC market did lead to additional compliance ongoing work for us and we saw that come through in Q1, we saw that come through in Q2 and we expect that going forward. In addition, in the second quarter, we do benefit from the proxy season, which is a seasonal activity. And we had some really good performance there as well. I think in terms of guidance and how that flows through, I don't know, Dave, if you want to add anything to your prior comments.

Yes. So, when you look at that Q3, again, the midpoint of our guidance, for transactional, assume something similar to the call it mid 70 million numbers that we recorded in Q2. But again, that year-over-year comparison is extremely tough. Last year, third quarter, transactional revenue was 114 million. And again, that was the highest quarter that we've seen for transactional in a quarter in the last five years. I think probably on margin, the most relevant point here we get, and we noted this on the first quarter call and reiterated it today. And that said, our margin profile is much, much stronger than the historical margins, we were delivering in quarters with similar overall and transactional revenue. Raj, I went through some of the comparisons in the prepared remarks. I think the takeaway there is, is that the company is fundamentally more profitable, regardless of the transactional environment. Now, we'll certainly see the impact of changes in the transactional market. But I think when you think about the underlying baseline profitability, it's really substantially higher than it was just a couple of years ago. And again, that's due to the changing sales mix, more software, less print, as well as the actions that we've taken on to permanently reduce the cost structure and all that getting reflected in the results.

Right. Thanks for that. But the Q3 guidance still seemed very conservative given where you see, transactions is flat to second quarter, and then compliance, do you not do, I mean, there's a seasonality impact from Q2, and compliance and 10-K that you won't see, but you do not see the market share gains coming through in Q3, and Q4 as well?

No, those gains will come through, I think, when you look at the -- to your point, the seasonality aspect of compliance, and you can take a look, last year, as an example, compliance last year went from $48 million in Q1 to $58 million in Q2, down to $28 million in Q3, and $21 million in Q4. So again, you know, Q1 with 10k, Q2 with some K, obviously, all the quarters had a Q, but that proxy volume, so the seasonality in compliance is just much, much lighter in the back half of the year than it is in the front half of the year.

Got it. Got it. Thanks. And then another last question is on the print --

Raj, sorry, just one more thing, and, we have in our -- on the investor site, on the website, a trending schedule that goes back quarterly to 2019. And so, I think it'd be helpful, you can see, really how that seasonality plays out. It's pretty consistent in each of the last three years.

Great. Got it. And then the print side, are most of the cuts been taken? I think you indicated, there also seems to be better than expected performance on the print side, in Q2, or -- ?

Yes. So no, no, it's a great point. So on the first, the first part, the answer is yes, more than more than half of the print and impact has been reflected in our year-to-date results. We think, there's a little bit that happens in the back half of the year. But, generally absorbed, on the second point around print being a little bit better than our initial guidance on, the combination of the regulatory impact as well as, some of the contract pruning that we were doing, we changed that estimate for this year. We initially set about a $40 million revenue impact. And, essentially no EBITDA impact, we've taken that down to about a $30 million impact. And from a revenue perspective, and actually from an EBITDA could actually be helpful. And the reason for that change is that a lot of the contracts that we thought we were exiting, through price increase, and we thought that we would likely lose, we've actually retained more of that work at substantially higher prices, at a margin that's now acceptable on that work. And therefore, the total impact of print from a revenue perspective is less, and we actually get, pretty reasonable market on it now.

Great. Thank you. I'll take my questions offline. Thank you. Congratulations, again.

Thank you, Raj.

Thanks, Raj.

Your next question comes from Pete Heckmann. Your line is open.

Hey, just two quick follow-up. So just to be clear on, on capital markets, transactional revenue, certainly, that outperformed our expectations, given that some of the activity we saw, but is it fair to say the two areas that outperformed or at least get better would be M&A overall, including with venue and then defect mergers?

Yes. Pete, so we would agree, I think even relative to the guidance, we had assumed lower transactional revenue. And again, as we noted, you know, the overall M&A including De-SPAC was much more -- or much less impacted on a year-over-year basis than then IPO activity.

Okay. Okay. I just wanted to make sure there wasn't, some unusual pickup in some other item there. And then my second question is just that, I get the building number of public companies is good for DFIN, plus, the fact that you've been involved in so many IPOs of those new public companies is good for DFIN. But just looking at the share of IPOs, in the first half that was down, fairly materially from the normal run rate of like 35% to 40% of IPOs retaining DFIN, does that primarily just because most of the ideas in the first half were either pretty small, or are just the increased mix to SPAC versus the traditional IPOs?

Yes, correct. This is Craig Clay. So Q2, slowest IPO quarter since 2009, and most of what you saw what you just referenced, micro caps accounted for the majority of all IPOs in the quarter, there were only six IPOs, that raised more than 100 million. The largest was Bausch + Lomb, 77% of the IPOs in Q2, under 36 million and 43% of these were foreign issuers. So in other markets, those would be a fundraise. That's not where we play and that really down market in the first half of the year, there have been 11 IPOs, greater than 100 million, and we have completed eight of them. So we're really pleased with our share. I think when you look underneath the work that's happening, Dave and Dan both mentioned the IPOs that are active. The companies that have publicly announced their intent to price in Q3, which include Claire's, tend to care, Specialty Building Products, and Steinway, others that have announced their intent to price this year Instacart read it and click. I look underneath that. And I think we're doing really well within the several 100 that continue to work. So absolutely our share looks like, it's taken a hit, but it's really the market within that. And I think what we see and hear from our clients is some optimism and history has shown and demonstrated that the change in the capital market can happen really quickly. We've seen it on the downside right now. We're waiting for that to normalize. And we're hopeful that IPO window open soon.

Great. All right. That's great color. I appreciate it, Craig.

You're welcome.

There are no further questions at this time. Mr. Dan Leib, I turn the call back over to you.

Thank you, Joseph. And thanks everyone for joining us today. We appreciate the interest and the ongoing support and we will look forward to our next earnings call in November. Thank you.

This concludes today’s conference call. You may now disconnect.