Good morning. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelley Financial Solutions Third Quarter Earnings Conference Call. Today's conference is being recorded. 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 Instructions] At this time, I would like to turn the conference over to Michael Zhao, Head of Investor Relations. Please, go ahead.

Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions third quarter 2022 results conference call. This morning, we released our earnings report including a 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, and good morning everyone. Our third quarter results offered further validation of our strategy, including strong overall adjusted EBITDA margin performance, continued double-digit growth in our SaaS compliance offerings and great progress in expanding the adoption of our offerings in the marketplace. That said, it was in the context of a very challenging operating environment, which resulted in a nearly 50% reduction in our transactional revenue, as capital markets transactional activities continued to be severely impacted by the combination of macroeconomic headwinds and market volatility. A weak capital markets transactional environment resulted in lower-than-planned revenue in the quarter, while our third quarter adjusted EBITDA margin of 24% was in line with our expectation and once again significantly higher than historical quarters with similar overall and transactional revenues. Our third quarter adjusted EBITDA margin performance, which reflects our evolving sales mix, permanent changes to our cost structure and continued cost discipline, further demonstrates our ability to sustainably operate at a higher level of profitability across a range of market conditions. One of the fundamental drivers of our favorable margin performance against those historical periods with similar overall and transactional revenues has been our strategy to shift sales toward higher-margin software solutions, achieving a higher level of software sales mix has been a central focus of our transformational journey. And during the third quarter we made continued progress in transforming DFIN into a software-centric company. Total Software Solutions sales accounted for nearly 37% of total third quarter net sales, an increase of approximately 880 basis points from last year's third quarter sales mix. A trailing four-quarter basis, Software Solutions sales reached $285 million, growing 14% from the third quarter 2021 trailing four quarters and represented 32% of total net sales, an increase of approximately 590 basis points from the…

Thank you, Dan and good morning, everyone. As Dan noted we delivered strong third quarter results in the context of a very weak capital markets transactions environment. The volume of capital markets deal activity remained substantially below last year's levels as the market softness in the first two quarters of 2022 weakened further in the third quarter especially in M&A which had performed relatively better than IPOs in the first half of 2022. Additionally, the third quarter of 2022 faced very tough comparisons, given 2021's record performance and market conditions. Despite the sharp decline in deal volume our focused efforts to execute our strategy have enabled DFIN to become fundamentally more profitable compared to historical quarters with similar level of overall sales and transactional activity. By continuing to focus on operational efficiencies, while also improving our sales mix, specifically more software and less print sales third quarter adjusted EBITDA margin was 810 basis points and 1030 basis points higher than the third and fourth quarters of 2019 respectively, despite overall sales and transactional sales in this year's third quarter being slightly below the levels we reported in those quarters. Our third quarter results provide additional positive proof points that our strategy is working allowing us to deliver stronger financial results regardless of market conditions, while also continuing to invest and evolving to a more current sales mix. aggressively managing our cost structure and being disciplined stewards of capital. On a consolidated basis, net sales for the third quarter of 2022 were $188.7 million, a decrease of $59 million or 23.8% from the third quarter of 2021. Substantially, all of the year-over-year revenue decline took place in the capital markets transactions business which was down $55.9 million or nearly 50% versus last year as Dan noted earlier. Software Solutions net sales…

Thanks, Dave. Our third 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 with historical periods of similar size revenue. The actions we have taken since the spin, including deleveraging the balance sheet, investing to drive recurring sales, permanently reducing fixed costs and focusing on profitability and cash flow position us well as we operate in a challenging environment. It is difficult to predict the end to the current downturn in capital markets our solid financial profile provides us with the foundation to continue to execute our strategic transformation. We remain enthusiastic about the opportunities ahead to continue to generate increased value to our customers, employees and shareholders. Before we open it up for Q&A, I'd like to thank the DFIN employees around the world who've been working tirelessly to ensure our clients continue to receive the highest quality solutions. Now with that, operator, we're ready for questions.

Thank you. [Operator Instructions] We'll go first to Charles Strauzer at CJS Securities.

Hi. Good morning.

Good morning, Charlie.

Just to clarify a little bit on the shortfall in the quarter. Obviously, your transactional was the key part of that, but is it safe to say that all of the shortfall was related to transactions.

Yes, Charlie, it's Dave. As we noted that was substantially all the driver of the total shortfall versus our guidance, I think when you look at kind of the traditional transactional line as well as some of the -- what we call the carryover impacts, whether it be Venue or some of the other compliance work that's affected by transactional that was really all of the delta we saw relative to the outlook that we gave in August.

Great. And obviously you did a good job of holding margins in that mid-20s range 24%. What do you have to do to kind of kind of maintain that going forward not just in Q4, but kind of going forward from there too?

Yes. It's a great point and one that we've been hitting on all year long that despite the decline in transactional and I think when you look at we pointed this out historical quarters where we saw lower levels of transactional. The margins were much, much lower in the call it mid-teens rate. And throughout this year at similar levels being able to maintain margins in the mid-20s is really just a function of a lot of things that we've highlighted over the years. It's really being disciplined on the cost structure, shifting the mix to much more heavily weighted to software. And then as we've talked about exiting some of the lower margin print work. Some of that obviously was regulatory driven. Some of it was actions that we've taken to reduce the overall print activity. And then even the last thing, I would say, even on the remaining print work is the higher price levels that we're getting, which really helps profitability across the board. And I guess more specific to your question on a go-forward basis that will be the same playbook that we're going to use going forward, continue to be disciplined on the cost side, look at pricing opportunities and shifting the mix going forward. And as you know, our long-term guidance is for margins to approach 30%. And we think that the mid-20s with this level of transactional really gets us off to a good way on that path to achieving that.

Great. And then, just, lastly for me, I'll jump back in queue, is just cash flow expectations in Q4. Just kind of some color around that.

Yes. And cash flow is always the one that is a little bit harder to predict, just given a couple of days matter in terms of collections of receivables, et cetera. There are a couple of things that impact, I think, Q4 relative to last year. Overall, I think, my expectation would be that cash flow is pretty similar to last year's level. And, like I said, I think there are puts and takes. I think, number one, you look at the implied EBITDA in our guidance, certainly lower than what we reported last year. So that's a negative impact. I think, going the other way, we'll have lower tax payments, just given the lower overall profitability this year, lower interest payments, given the debt structure. And so, net-net, I would expect that we're pretty close to last year's fourth quarter free cash.

Great. Thank you.

We'll go next to Pete Heckmann at D.A. Davidson.

Good morning, gentlemen. Thanks for taking the question. I apologize if you had already called it out. But just curious, FX headwind in the quarter and sort of assume that that would have been just marginal, but still trying to keep track of it.

Yes. Pete, it was a pretty small impact that went against us. And you can see we have a page in the earnings release. I think it's the page 11 that shows, on a reported basis for the quarter, the sales were down 23.8%. And on an organic basis, excluding FX, it was about -- down 23%. And that -- some of the impacts vary by segment and I would just refer you to page 11 in the earnings release.

Okay, okay. I'll take a look at that. And then, just in terms of the SEC, I believe, it's a new rule, it may still be a proposal, but new rule on the tailored fund reports, how are you thinking about the trade-offs between potentially shorter reports that might mean more less print revenue, but maybe more in terms of tech-enabled services around consulting, potentially tagging other things. Generally, how would you think about that? And on a net basis to DFIN?

Hey, Pete, this is Eric Johnson. Thanks for the question. As you know and as we've talked about in the past is that, we have a recurring revenue business model and we're driving both software and compliance management solutions focused on financial and regulatory reporting. So the removal of print and in some cases our exit of print has had really no impact on the ongoing complexity of the financial and regulatory reporting requirements for our clients. Our tech-enabled solutions help our clients meet rigorous regulatory requirements on a daily basis. And we do that via project management, document management and filings. And as Dan mentioned earlier, the tailored shareholder report will somewhat aligns with what we're already doing in this segment, where our tech-enabled solutions will help our clients meet the new regulatory requirements and the changes associated with Summary reports. It's a great fit for our digital platform by the way, and then from a software perspective, we'll be able to help our clients meet rigorous iXero [ph] and ongoing filing requirements through our Arc Suite.

Yes. And I guess -- Pete, it's Dan. I'd just add a couple of things. One is as the regulation gets rolled out, et cetera. It's probably a mid-2024, beginning 2024 type of impact. And then to Eric's point, when we see the shift there is beneficial to us from a margin perspective and driving software and -- software and tech-enabled services.

Okay. That’s helpful. Thank you.

Thank you.

We'll take our next question from Raj Sharma, B. Riley.

Hi. Good morning. Thanks for taking the questions. My question essentially is in the transaction side of the business. I see that you did slightly better than the overall industry performance. Any sort of color on the breakdown between M&A IPOs and SPAC follow-on, and any sort of color on geographic differences between how the industry did in transactions and how you guys are faring? And then I have a follow-on question.

Sure. Thank you for the question, and then I'll turn it back to you a follow-up. So, as you heard the weakness in the trans market accelerated in the quarter down 50%. It's driven by all the macro issues that we all know too well. It's our lowest level of trans revenue since Q1 of 2020. But Q3 of 2021 last year was a high watermark for us for our transactional business. It’s certainly a challenging comp. The transactional revenue in the third quarter of 2021 was the highest it had been in the previous five years. So that it grew 50% from 2020. So what's driving it this year? Certainly the US IPO market, it's on track to raise the lowest proceeds in 30 years per Renaissance Capital the one source we all use, it will be the toughest quarter the third quarter for new issues in over a decade. And what did come out of the pipeline and IPOs micro caps, it was most of the deals. There were only three IPOs that raised more than a $100 million. We were fortunate to work with two of those. And then as you move to M&A, it's been more resilient than the IPO market, but in Q3, as you heard it to weekend down 30% from a year ago. This is primarily US facts. Europe greatly disadvantaged by all the courses and factors they have going there as well as our APAC regions given what's happened in China. So despite all of this, deal-making remain in place from what we hear from our deal teams and investment bankers. And we believe, as you stated, we're performing better than the market. We have a really robust pipeline of IPOs M&A SPAC, de-SPAC where work is happening. So engagement's high. Clients are working. So this underlying activity gives us confidence that when the volatility subsides these transactions are going to provide a really rich pipeline for us. And again they are on-ramp to software. All of this is an ecosystem that's driving our Venue virtual data round, typically transactional M&A related, but more importantly our ActiveDisclosure platform, which is driving recurring compliance revenue. So the past has shown, we're all in this business when the transactional market changes it can be swift. And they also can come back very quickly and we think we're really well positioned. Then back to you for the follow-up.

Right. Thanks. Thank you. So also my follow-on question is on visibility. Were you -- you were into the third quarter when you gave a forward guidance. Were you surprised significantly in 3Q transactional performance? And how does visibility into a quarter and trends typically work?

Yes. Go ahead.

Yes. So. Raj, I'll start. Sorry, Craig and then Craig can jump in. So clearly the variance between what we communicated back in, I guess, it would have been August was the transactional market impact. So visibility we had to your point we had one month under the belt in Q3. And you can tell what's being worked on we understand what's coming in et cetera -- when they're actually moving. And then obviously, as things play out IPOs have a shorter cycle time than most M&A. And so, yes, the visibility is always a bit challenging. And so that was what drove the variance relative to where the guide was on the revenue side and then on the margin side to this point on all that we've done in variabilizing the cost structure and driving margin changing the mix of the business certainly helped. And, sorry, Craig you were going to add.

Yes. I think to just build on that as you rewind August, we had a different view of the optimism that our clients were showing us. We read about that for IPOs that we plan to go in the back part of the year post summer. We announced it here and we have additional visibility on the number second. If you look at the October IPO market, which only had two, but the underlying optimism there those who show that there's still investor demand for these companies. And certainly if you come back to all the comments that we've had about resilience and endurance or profitability profile, we believe we're in a great position. Our clients are working and that when the market shifts and the window opens we're going to be there for not just these deals, but for recurring software subscriptions.

Got it. Thank you. And then just lastly, any sort of color on how you expect the Venue and the rest of the software products – did you specifically, Venue, do you expecting to kind of do significantly better in 4Q and the quarters beyond or?

Yes, I think great question. I mean if you look at Venue's performance, clearly at leveraging and playing to the M&A market. Last year, full year we grew at 46%. In the quarter last year we grew at 53. And that's outsized and substantially faster than our market peers. So despite the significant decline in the third quarter, we feel Venue is continuing to perform better in its primary use case of M&A. So with M&A down 30%, Venue's performance is pretty good. It also grew sequentially from Q2 of 2022, which demonstrates the continued activity that's taking place here. Again, what we're seeing within the product, investors are viewing this turbulence as an opportunity for better valuations, more reasonable valuations. I think it's a welcome change and the demand is still high. So headline tends to be to drop-off from 2021 but the big picture is there's still a really great fundamentally active pipeline there. And as we look at that product, we plan to continue to take share, given our product superiority. We're winning deals. One of the key pieces to this across all of our software products, ActiveDisclosure Venue and Arc is security. So we have a great new trust center on our website. We're winning, based on these benefits. We're going to market in specific recurring use cases for Venue, such as energy, franchise management, healthcare and technology. So we're super excited about the performance and we feel good about Q4 and 2023.

Great. Thank you for that. I’ll take my questions offline. Thanks.

Thanks, Raj.

And that does conclude the question-and-answer session. At this time, I would like to turn the conference back over to Dan for closing remarks. End of Q&A:

Great. Thank you Audra, and thank you everyone for joining us. We look forward to connecting in February and in the interim at some investor conferences. Thank you again.

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