Thank you for standing by. My name is Kayla Baker, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelley Financial Solutions First Quarter 2023 Earnings Conference Call. [Operator Instructions]. I would now like to turn the call over to Head of Investor Relations, Mike Zhao. You may begin.

Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions First Quarter 2023 Results Conference Call. This morning, we released our earnings report, including a supplemental trending schedule of historical results, copies of which can be found on 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. In 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 certain non-GAAP financial information, such as adjusted EBITDA, adjusted EBITDA margin and organic net sales change. 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'm 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. We delivered strong consolidated first quarter results given the economic backdrop with net sales of $198.6 million, non-GAAP adjusted EBITDA of $42.4 million and non-GAAP adjusted EBITDA margin of 21.3%. Our first quarter performance again delivered a higher level of profitability compared to historical quarters with similar overall and transactional revenues. Another proof point that the execution of our strategy has resulted in DFIN becoming more durable and structurally resilient as we continue to invest to shift toward a more favorable recurring sales mix while continuing to aggressively manage our cost structure and being disciplined stewards of capital. As I mentioned, our first quarter performance was in the context of a very challenging operating environment. As capital markets transactional activity continued to be severely impacted by the combination of macroeconomic headwinds and market volatility. For context, the level of IPO transactions during the first quarter remained at record low levels down approximately 95% from the peak reached in the first quarter of 2021, while M&A activity also remained far below historical levels. Combined, these headwinds resulted in the lowest level of quarterly capital markets transactional revenue since our company's inception in 2016, a level which is down approximately 20% from the first quarter of 2022 and down approximately 55% from the first quarter of 2021. I am pleased that during the prolonged downturn in capital markets transactional activity, our business has proven to be resilient and substantially more profitable. Specifically, our first quarter 2023 adjusted EBITDA margin of 21.3% is 1100 basis points and 770 basis points higher than the first quarters of 2019 and 2020, respectively, both of which had higher levels of both overall sales and transactional sales. Our performance reflects our evolving sales mix, permanent changes to our cost structure…

Thank you, Dan, and good morning, everyone. Before I discuss our first quarter financial performance, I'd like to recap a few housekeeping items, which impacted our year-over-year comparability in the quarter. First, as noted in our earnings release, during the first quarter, we sold our investment in Mediant. DFIN received proceeds of $11.8 million from the sale, including $8.9 million of cash and common stock of the acquirer. The sale resulted in a pretax gain of $6.7 million, which is recorded within corporate on the investment and other income line of our income statement. Second, as discussed on last quarter's earnings call, we completed the disposition of our EdgarOnline software offering in the fourth quarter of 2022. For the full year 2023, the disposition negatively impacts the year-over-year total net sales comparison by approximately $5 million, with the vast majority of the impact affecting the first 3 quarters of this year. The impact on our gross profit and non-GAAP adjusted EBITDA comparisons is de minimis. For purposes of segment level year-over-year net sales change discussions, I will refer to the organic net sales change, which adjusts for the impacts of the EdgarOnline disposition as well as changes in foreign exchange rates. A reconciliation of reported to organic net sales change is included in our earnings release. Finally, certain technology expenses that were included in cost of sales in 2022 are recorded within SG&A in 2023. As a result, compared to the first quarter of 2022, there was a $2.6 million reduction to cost of sales and a corresponding $2.6 million increase in SG&A with no impact to the year-over-year comparability in non-GAAP adjusted EBITDA or consolidated net earnings. This change positively impacts year-over-year gross margin comparability by approximately 130 basis points and negatively impacted non-GAAP SG&A as a percentage of…

Thanks, Dave. Our strong performance in the first quarter was the result of the disciplined execution of our strategy and again demonstrated DFIN's ability to perform well in challenging market conditions. While it is difficult to predict the end to the current softness in the capital markets transactional environment, our solid financial profile provides us with the foundation to continue to execute our strategic transformation. Our focus remains on accelerating our business mix shift by continuing to grow our recurring SaaS revenue base, while maintaining share in our core traditional businesses. We will continue to invest in our Compliance Software platform to capitalize on regulatory tailwinds. In addition, we will continue to aggressively manage our costs and drive operational efficiencies while maintaining our historical discipline in the allocation of capital. 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. Now with that, operator, we're ready for questions.

[Operator Instructions]. Your first question comes from the line of Charles Strauzer with CJS Securities.

Given the better-than-expected results in Q1, can you talk about maybe give us a little bit more color on what some of the drivers were through those pretty strong headwinds.

Yes, Charlie, thanks for the question. This is Dave. I think when we looked at what our guidance contemplated for Q1. As we mentioned on the last call, the quarter started out slow. We did see a better month of March, specifically in transactional revenue. And as we noted on the -- in our prepared remarks that so far in Q2, we're seeing a relatively stronger transactional environment than the first 2 months of the year. Certainly, in the grand scheme of things, the market is still soft, but I think signs of life in the transactional market, certainly helped Q1. As we said, we're expecting a modest increase in transactional revenue in the second quarter relative to what we had in the first quarter here. And as we said in the past, hard to predict exactly how that's going to play out, but certainly seeing some positive signs here.

Great. And then just picking up on the Q2 guidance, just a little bit more on what you're implying behind the assumptions in your guidance there.

Yes. Again, so -- Charlie, I'll comment on a couple of pieces and then if you want to follow up with another question, that's great. So as I mentioned, modest increase in transactional relative to Q1. I think when we look at -- we talked about some of the things impacting the traditional compliance revenue within capital markets. We had some timing shifts this quarter. And with some of the SPACs liquidating on a year-over-year basis, we're going to have a modest -- or expecting a modest decline in Q2 here. I think when you look at some of the software offerings, right, we talked about ActiveDisclosure and the increased customer churn in the first half of the year as we shut down AD3 and by the end of the second quarter and we'll be -- have the clients -- all the clients left will be on the new platform. And so we would expect that going forward in the back half of the year that we'll start to see a pickup in ActiveDisclosure and then pretty similar story when you look at Arc, we're overlapping some tougher comps in the first part of the year with the adoption of total compliance management throughout '21 and into '22 and would expect that growth rate on the software to start to pick up in the back half of the year.

Great. That's very helpful. And just my question was just thoughts on full year and especially specifically on free cash flow, what your expectations are there, given the increased spend on the transformation.

Yes, we haven't given full year guidance. And I think for us, and as you know, the biggest variable will end up being what the transactional volume looks like. And so we're reluctant to give a full year number just because that can have pretty significant swings. Like I said, I think we're encouraged by what we've seen in the last 2 months here, kind of trending the right direction. That said, we've also I think has taken a prudent approach on the cost structure. We talked about the cost actions we've taken here again in Q1, and those will impact the rest of the year. from a transformation perspective, we said about $5 million in the quarter, and those are certainly not permanent costs. We would expect to start to see some benefits and that cost tail off in the last part of the year.

Your next question comes from the line of Peter Heckmann with D.A. Davidson.

This is Brett Thompson on for Pete. I just had a quick question following up on the tailored shareholder reports opportunity. Can you better quantify the potential benefit for the Investment Management segment, all right. And thank you for some color on the new regulations. Would we be in the ballpark to estimate $10 million to $30 million range of opportunity on a full year basis?

Yes. So let me kick off, and then I'll see if Eric wants to add anything. So the regulations have been put out. We're really excited, as we mentioned, the great fit for our platform from software to service to output. That said, we are in initial discussions with clients and the move from a fund level to a share class level really increases the number of units that this will be applicable for. So we'd be looking towards later in the year, likely our November call when we would do a greater quantification. And just to remind you that the regulation kicks in, in mid-2024 for compliance. So many will adopt earlier and be ready to go, and all will be ready to go in the first half of '24. So we'd expect roughly a half year, maybe a little bit more of impact in '24 and then full impact in '25 relative to shareholder reports. And Eric, I don't know if there's anything you want to add?

Yes, sure. Thanks, Dan. Yes, Brett, in addition to what Dan had described around the fund level, moving to share class level reporting, we see in talking with some of our clients, the impact will be 3 to 5x the number of reports they produced today. From a filing perspective, in addition to the NCSRs that they filed today, one of the bigger change in all this is the filing requirements are going to expand to include iXBRL for each TSR. So meaning, overall, much more EDGAR complexity and significant filing sizes due to the share class level disclosure in iXBRL tagging. And as Dan mentioned in his opening remarks, downstream impacts are significant as well. We're talking about linking and layering or layer disclosure, as Dan referred to earlier. These requirements require linking the share class level reports to the base reports. And also there's web hosting and ADA compliance as well as distribution requirements. So there's significant change in the workflow, significant change in the industry. And I think the takeaway for us is, it's important to note that while this is new for our financial reporting clients, DFIN provides all these requirements today. So there's nothing really new from a DFIN perspective. We're bringing our domain expertise and experience together to help our clients meet the complex regulatory reporting requirements for tailored share reports, and we'll be going through that process all year as we're bringing our clients onboard. Dan, back to you.

[Operator Instructions]. And your next question comes from Raj Sharma with B. Riley.

So I wanted to kind of delve a little bit into the software side of -- so specifically to begin with the Venue sales. What is really driving Venue sales? Is it purely market share gains? Is it -- and also how is the product structured? Can you remind us, is it 100% a SaaS product? Or is it purchased for a period of time for a transaction and then turned off? And how should we think of Venue if tough transaction environment persist or if it improves -- sorry, a lot of questions back into what.

No, no, no. No, I get the gist of it. So let me start and then Craig can jump in as well and Dave, if you'd like. Our product is more aligned to the M&A market. And so it does tend to have more volatility in it. We do find clients will use it for a transaction and then keep it on longer to archive pages and/or to do work for acquisition integration, et cetera. But if you look at the level of sales growth that Venue has had and you go back to really strong years, in transactions, so go back to 2021 where Venue grew at close to 46% for the full year. That was obviously in the face of fantastic transactions market. If you go to 2022, where transactions were down roughly 40%, Venue was down 6%. So we would view that as pretty big outperformance given the main use case. Similarly, in this quarter, Venue was down just under 1% and the trans market or our transactional sales, the market was down more. But our transactional sales were down about 20%. And so we would view that again as outperformance. I made some attribution to really strong sales execution. The product itself is a very good product, and we've been successful in selling it into the marketplace. And so Craig, I'll let you weigh in as well.

Yes, Dan, to build on that, we are encouraged by the underlying activity that's taking place on the platform to support primarily M&A activities, but we're also pivoting into subscription sales. We have a number of verticals that we're supporting from life sciences to franchise. We're also hearing from our deal makers in this environment, they're finding growth opportunities despite the volatility. There's value adjustments that are driving that. There's high demand for quality assets. There's a lot of cash on the sideline that's being looked at to put to work. So as we look ahead, our Venue pipeline is good, as Dan said, driven by some sales execution as well as product so in April, we released Venue's multi file redaction technology. So it's things like that, that sets the benchmark for the VDR industry. Our clients are able to redact across all their folder structures, their file structure in the entire room, which is incredible to be able to redact anything from terms images, regions of the document. And we're the only provider that's doing that. So we're bringing these solutions, helping our clients. We're also winning awards through leading security. So last week, we announced that we had won a ActiveDisclosure award as well as our Venue Virtual Data Room from Global InfoSec. So it is a great opportunity. We're honored to be recognized as a security leader. The most important thing in a VDR is sharing these documents broadly and having the security to demonstrate that. So these awards validate our efforts as a trusted partner for financial services. So we're seeing great adoption. We're executing on the plan to win in any market. as Dan said, higher markets, we're going to win more. We're really happy with what's happening today. And we are uniquely positioned on the deal team as M&A work continues that we're going to drive software through our Venue Virtual Data Room.

So this sounds like you have a fantastic product. I think going forward, would you expect more market share gains on Venue? Or would the growth the movement in revenues to be more in line with what the transactions market does. I mean I'm sure there is going to be some market share gains, but how do we sort of view that moving forward? Is there more to be had, more market share gains to be had?

Yes. I think as we continue to execute, we're going to have incremental gains in any market, right? So it will be hard to disaggregate that as the market shifts very quickly. But we are executing. We're executing daily. We're going against our competitors. We're winning. We'll continue to execute that through every market, and we're excited about the ability to win no matter what.

Great. And then if we can move on to the next one, the ActiveDisclosure, how should we think of ongoing growth there? Do we -- and did I hear that the transition is almost done from the legacy to AD3, is that going to be done in the second quarter? Is that the quarter we are in? And so then there are new product extension enhancements? Or is there more to be gained here in terms of market share?

Yes. So I'll just kind of summarize what you heard from Dan and Dave. We picked up slightly in Q1 from Q4, but we've had a number of headwinds. So we've had elevated churn due to the AD3 decommissioning. We are almost through that, and we'll complete it in this quarter. So we're nearing the end of that transition. So some of the remaining clients are not going to make that journey, just like we saw in 2022 and Q1 due to price or due to fit. So another positive trend underneath that is what we saw with the competitive churn on new ActiveDisclosure. So given its maturity, a capabilities perspective, that trend should continue into 2023. Dave mentioned the fewer IPO clients that we're adding. But what we saw is that DFIN has a strong IPO share and our ability to retain those new public companies is terrific. So we're going to benefit as we expect to see hopefully an improvement in the IPO market in late 2023. The SPACs have reset. So we have had companies that were reporting on there that have liquidated. So we are working our way through that, and we are finding footing in the SPACs market. So then you get to the go forward, which is we're excited by what we see on the new AD platform. We have the newest disclosure tool in the market. It's modern. Price remains a strategic opportunity. Our clients want a choice, and they're signing up for multiyear agreements. So the new ActiveDisclosure contract length that averages about 25 months. So our top priority has been the transition of our clients from AD3. Now with that past, we will focus on new logos, competitive takeaways or sales enablement is reducing our sales cycle. We have over 1,000…

Yes. Just lastly, on the transactions in Q1 could you talk about the composition of IPOs, M&As and the sequential pickup is happening? Did I hear in IPOs or - and M&A or -- could you give us a little bit more color there, please?

Yes, Raj, we didn't specifically break it out, but I think we said that the M&A market was down but not as weak as the IPO market I think we're seeing activity across the board kind of trending in the right direction, again, in the context of a very weak environment, but moving positively.

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

Thank you, and thank you, everyone, for joining us. We look forward to our next call in August. Thanks.

And this concludes today's conference call. You may now disconnect.