Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelley Financial Solutions Second Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Michael Zhao, Head of Investor Relations.

Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions' Second 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 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 certain non-GAAP financial information such as adjusted EBITDA, adjusted EBITDA margin and organic net sales. 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. We are pleased with the company's performance during the second quarter, especially in light of continuing softness in capital markets transactional activity. In this difficult operating environment, we delivered strong second quarter results, including net sales of $242.1 million and adjusted EBITDA of $74.3 million, resulting in adjusted EBITDA margin of 30.7%. Our second quarter performance once again demonstrated the resiliency of our operating model and the sustainability of our performance in a challenging external environment as our business mix continues to transform. A key driver of our second quarter results is the improving performance of our Software Solutions portfolio. Software Solutions' net sales growth accelerated in the second quarter to nearly 8% on an organic basis versus the second quarter of 2022, an increase from the growth trends over the last few quarters. Importantly, the second quarter Software Solutions net sales growth was broad-based, with all 3 of our key software offerings, Arc Suite, Venue and ActiveDisclosure, delivering stronger year-over-year growth compared to recent trend. Software Solutions made up approximately 31% of total second quarter net sales, up approximately 440 basis points from last year's second quarter sales mix. As a reminder, the second quarter, largely due to the annual meeting and proxy season, historically represents our largest quarter overall yet represents a seasonal low for software as a percentage of revenue. On a trailing 4-quarter basis, software sales of $284 million represented approximately 36% of total sales, an increase of approximately 590 basis points from the second quarter of 2022 trailing 4 quarter period. Our second quarter adjusted EBITDA margin of 30.7% is nearly in line with last year's very strong second quarter adjusted EBITDA margin despite a nearly $30 million or approximately 40% year-over-year reduction in capital markets transactional sales.…

Thanks, Dan, and good morning, everyone. As Dan noted, we delivered strong second quarter results in a challenging environment. Despite an ongoing reduction in year-over-year transactional volumes, 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 growing our high-margin Software Solution sales, second quarter adjusted EBITDA margin was approximately 900 basis points and 680 basis points higher than the second quarters of 2019 and 2020 respectively, despite overall sales and transactional sales in this year's second quarter being slightly below the levels we reported in those quarters. Our second quarter results provide additional positive proof points that our strategy is working, allowing us to deliver strong financial results across various market conditions while also continuing to invest and evolving to a more recurring sales mix, aggressively managing our cost structure and being disciplined stewards of capital. On a consolidated basis, total net sales for the second quarter of 2023 were $242.1 million, a decrease of $24.1 million or 9.1% on a reported basis and 8.3% on an organic basis from the second quarter of 2022. Given the very weak transactional environment, more than all of the year-over-year net sales decline occurred in capital markets transactional sales, which was down $28.1 million or 38.2% versus the second quarter of 2022. The decline in capital markets transactional sales was partially offset by growth in Software Solutions net sales, which increased $4.1 million or 5.7% on a reported basis and 7.9% on an organic basis compared to the second quarter of last year and reached a new quarterly net sales record. Second quarter adjusted non-GAAP gross margin was 59.5%, approximately 150 basis points higher than…

Thanks, Dave. Our performance in the second quarter offers a further proof point that our strategy and execution continue to make DFIN more durable and structurally resilient than in the past. As we progress on our transformation journey, we will continue to invest in opportunities to drive profitable recurring revenue growth while also continuing to aggressively manage our cost structure and being disciplined stewards of capital. We are excited by the opportunities created by regulatory changes on horizon, including tailored shareholder reports, Financial Data Transparency Act and ESG, and the benefits they will bring starting in 2024. In the meantime, we're focused on creating best-in-class regulatory and compliance solutions to help our clients comply with regulations. Finally, as we head into the second half of the year, we are encouraged by the improved trend in capital markets transactional activity. 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] Our first question will come from the line of Charles Strauzer with CJS Securities.

I was hoping you could maybe delve a little bit more into the cost reduction efforts you've been taking on and really, what's going on there to drive the margins? And what portion of that is permanent versus temporary? And looking at the guidance for Q3, could we see potential upside there from continued efforts there on the cost front?

Yes, Charlie, it's Dave. I'll take that one. I think certainly -- and we've commented quarter in, quarter out regarding cost reductions, I would say the actions that we've taken are certainly permanent, and they really range across -- right across the company. I think -- in fact, when you look at the gross cost reductions, they're actually higher than what's reflected in our margin performance. And we've noted in the past that we've redirected a portion of the savings to really increased investment in other areas and predominantly, that's product development and IT, both of which are in support of our strategy to drive the Software Sales growth as well as to increase the proportion amount of our recurring revenue. And we're continuing to invest in those areas to create long-term value. I think on the permanence comment, you can see that in our historical margin trends. We have a slide in our investor deck, it shows the historical transactional revenue and the company's consolidated margin. You look at the trailing fourth quarter transactional revenue, it's right around $200 million. That's substantially below the historical average, yet our EBITDA margin has improved by about 1,000 basis points from, call it, the mid-teens to the mid-20 percent despite the challenging environment. And going forward, this will continue to be a focus for us, certainly driving efficiencies. But also importantly, continuing to invest in the strategy. Dan, I don't know if you want to add to that?

Yes. Thanks, Dave, and thanks for the question, Charlie. Yes, a couple of things just to maybe amplify on permanence. As Dave said, the majority of these are permanent, and the reason being is that it's -- these are really -- most of them are changes driven by the change in the way we do business. And so there's a lot of externally-facing improvements that have been made in terms of external products and the way we serve clients. And then we've also spent over the past several years and more work ahead of us on transforming the inner workings of the company and how we do work. And that's also led to new metrics being put in place, new ways of monitoring, et cetera, and that's also what's driven efficiency within the company. And as Dave said, these are net numbers. We continue to invest both in new product development, as Dave mentioned, and then also in enhancing the employee value proposition. So we've done a lot just to improve what we offer to the associates around the world who are making the strong results happen. And so a lot more ahead of us, but happy with what we've accomplished thus far.

Great. Just a quick follow-up. When you look at the strength in Software Sales this quarter, maybe a little bit more color behind what drove that? And the sustainability of that into the back half of the year?

Yes, sure. So it was broad-based, as we mentioned, and so maybe a little bit of a different story in each one. We had signaled -- I'll start with ActiveDisclosure. We had signaled that as we work towards the decommission of AD3, which occurred in June, that we expected to see in the back half an uplift in sales growth. And we saw probably a quarter earlier than expected, and so I feel good about the momentum that we have with that product. We have seen -- to the Venue, we've seen really strong performance, and we can go back and look at -- it just hasn't had the volatility that our transactions offering has had despite the fact that its main use case is M&A. Obviously, there's a lot more broader use case for Venue in terms of deals that may be private to private, utilizing the deal room, et cetera. But we've seen really strong performance, and that's been quarter in, quarter out, so feel good about that heading into the back half. As well, in our Arc Suite, which had strong growth in the quarter, we had said the same that last quarter was a bit of a depressed level, and we thought there would be higher sales growth going forward. So again, feel good there, and that's obviously independent of what we're looking at in '24 for Arc Suite relative to the TSR initiative.

Your next question comes from the line of Kyle Peterson with Needham.

Great. Just wanted to touch a little bit on the guide, and some of the assumptions behind the Capital Markets expectations for the coming quarter. It sounds like you guys were kind of optimistic about how 2Q ended and about how the quarter started so far, but I guess what assumptions you guys may put in the guide for Capital Markets activity for the balance of the quarter? Is it kind of a status quo in terms of what you guys have been seeing in the past 6 weeks or so? Or any improvement or deterioration? Any assumptions would be helpful.

Yes. Thanks for the question, Kyle. I think when you look at the guidance and what we're implying, right, and I'll talk sequentially at first, right, the transactional activity in Capital Markets, I think went up $4 million or $5 million between Q1 and Q2. We're probably looking somewhere in that same range sequentially in the $50 million range, again, at the midpoint of our guidance. I think on a year-over-year basis, then that decline, it's still a decline, but certainly muted relative to the year-over-year declines that we saw in Q1 and Q2. So I would say, cautiously optimistic, right? The activity in June had a modest pickup, and that obviously flowed through to the sequential impact in the quarter, essentially expecting that sequential uptick again here in Q3.

That makes sense, and it's helpful. And I just wanted to do a quick follow-up on compliance. It seems like that came in really strong this quarter. I know you guys called out both pricing and kind of pay versus performance disclosures, but I wanted to see if you guys could quantify or at least rank order on some of that upside and strength this quarter? Maybe how much came from pricing versus whether it be kind of a cross-sell, upsell or share gains here with some of these newer initiatives?

Yes. And it's tough to bring out specifically, I would say, the vast majority of that compliance work. And again, I assume you're talking about the Compliance and Communications Management segment and the compliance revenue there. What was proxy-related, and again, some of it driven by in performance, et cetera, some of it driven by pricing. The 2 kind of blend together, right, as we're performing additional work on behalf of the clients, aggregate pricing goes up. So it's a bit difficult to strip those two apart, but generally, proxy was the overall driver there.

Yes, David, if you wanted me to add to that. It's Craig. So from a compliance perspective, we have Q2 of '22, big growth, so over 27%. And pleased with the 1% this quarter. You mentioned the areas, it's a result of a number of things which is increased client count, new disclosure for pay versus performance, which is the tagging of that exact comp table. And then certainly, price increases. We're in an inflationary environment, we were able to work with our clients and certainly capture the value that we're adding. So in CNCM compliance or our Software, we're really leveraging that entire team of deal experts here at DFIN, and I think it shows. The results show our extensive network and relationships throughout this ecosystem is really benefiting or reoccurring business, whether it's our CNCM or certainly our software.

All right. Makes sense. That's helpful.

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

I wanted to talk a little bit about price again. Hearing that come up, that's always a good sign. I guess, do you sense that -- I missed it, but I don't think you've quantified. Can you talk a little bit about -- for the year about how much you think price is moving up? And kind of how you allocate that between regular price increases on Software, but then kind of wage inflation-related increases on Tech-enabled Services?

Yes, Pete, I'll start. I think when you look at from a pricing perspective, it will certainly vary from product to product. Craig mentioned the inflationary environment, and some of it's just the efforts to keep up or at least mitigate some of that. I think when you look at ActiveDisclosure and the transitions from AD3 to new AD, we talked about the price levels going up, mid- to high teens on average. A lot of that work has taken place over the last couple of years, and so incrementally, we're still ramping up on that product, right? And that's probably, call it, mid-single digit in 2023. And then I think when you look in aggregate, it's probably much closer to low single digit on a consolidated basis for the company. But again, that will vary from product to product. And to my earlier point, when Kyle asked the question, some of this is -- yes, we're getting paid more, but we're also doing more work so it's sometimes difficult to split that part. But I think low single digit is a decent indicator.

Okay. And then -- Craig.

Yes, maybe -- this is Craig. To maybe just frame it a little bit. It's capturing the value, so it's capturing the value we were delivering, whether that's in service realm, whether it's our built-in price increases on renewals. It's the client recognizing the value of a better product, so signing up for multiyear contracts. We have price as an opportunity with our competitors where we're able to deliver and bring them to us where our clients are able to buy what they want, not being forced to pay for modules that they're not using. So it's really an opportunity for us to capture the value that we're creating and meet the market where it's at.

Okay. That's helpful. That's helpful. And then we've been talking about tailored shareholder reports for a while, and it does seem like an interesting opportunity. I know you're still trying to really get a tight quantification of the potential benefit. But could you give us some sort of broad range, just thinking about the multiple share classes and some of the additional work that might have to occur on a printing basis? I mean, is it reasonable to think something in the range of like the $20 million annual benefit? I'm just trying to figure out, is it the $10 million or $100 million in terms of the potential benefit?

Yes, sure. So I'll start, and certainly, Eric or Dave, if you want to weigh in. I think you're thinking about it the right way in terms of it will be a broad-based benefit across Software, Tech-enabled Services and Print and Distribution. We certainly will put numbers out there. As we mentioned, it will be later this year or beginning of next year. This is an opportunity that is -- or a requirement that goes from fund level to share class level, so you can think about a multiplier effect there. That said, we're -- as Craig just mentioned, we look to charge based on the value that we add. We also know this is compliance-related work and our clients have fee pressure, et cetera, on the fund and ETF side. So we're selling both into third-party administrators and we're also selling into asset managers, and we'll look forward to providing additional guidance on the impact starting, and it will be a half year in '24, but starting the end of this year, beginning of next year.

Okay. All right.

Pete, sorry. And just on Dan's comment, the rule becomes effective midyear next year. Depending on the cycles that each of the funds report on, the likely year 1 impact will be less than half a year would be probably 25%, as you get kind of the clients overlapping their reporting timing and then the full impact starting in 2025.

[Operator Instructions] And your next question will come from the line of Raj Sharma with B. Riley.

Congratulations on a good quarter. If -- can I jump into the guidance? I'm trying to understand the outlook for Q3 better. Given the results in Q2, it seems -- Q3 outlook seems conservative. If I look at them, can you comment on transactions versus compliance? The sequential performance you're expecting in Q3? Up, down, or transactions versus compliance? And then can we talk about Software, or Tech-enabled part or Print part?

Yes. Raj, it's Dave. So I think I'll reiterate what I said on transactional, right? If you think about transactional sequentially, if you look at Q1 and Q2, we went from $41 million to just over $45 million and are estimating at the midpoint of our guidance around $50 million specific to transactional. I think when you look at Compliance, that analysis is more challenging just given the seasonality of the business. Certainly, 1Q and 2Q are much higher than the Compliance sales that we drive in Q3 and Q4. But when you look at it on a year-over-year basis, Compliance was, call it, flat to slightly up in the first half of the year. And again, at the midpoint of our guidance, kind of broadly flat or in that range for the balance of the year, and that's inclusive of Q3. And that's on the Capital Markets side. I think when we look at the Investment Companies Compliance work, again, some seasonality, a little bit less. Generally, we've seen some of that compliance shift from traditional to software. In the first couple of quarters, compliance revenue in investment companies was down, I think, $3.5 million over the first half of the year. And again, expecting something in that range again in the back half of the year.

Got it. And then on the Q2 results for -- can you talk about the actual level of the transactional makeup? How much was M&A and IPOs, and...

Yes. So I can kick off and then Craig, if you want to jump in with some additional detail here. When we look at, as we said, started to see a little bit of better IPO activity as we exited the quarter in June and the broad markets, they looked pretty reasonable in July as well. M&A remained very, very difficult. We commented that M&A was down 40% on a year-over-year basis, and so most of the benefit we saw was within IPO. Craig, anything to add there?

Yes. I think to reiterate, we have an M&A market that certainly has been significantly challenged, to say the least. When you look at the deals that are from CapIQ, whether it's $1 billion, whether it's $500 million, you have to go back before 2016 to find a market that even comes close. In the quarter, it was -- it doesn't even be the COVID 2020 year. So certainly, in M&A market, it was challenged. For the deals that are announced, we've been doing pretty well and holding our share there, just many fewer. And then from an IPO perspective, it's a market that's rebuilding. It is not fully open yet, the recovery is not going to be a straight line, but there are reasons to be upbeat as we've talked about. So we talked about the quarter, we see a little bit of movement publicly in July, but a lot of it is still under the water line. The pipeline for companies to go publicly filed deals over $100 million now stands at [25], and we have our historic share of that which is strong, and that does not include the companies who filed confidentially. So that really gets at what our clients are telling us, which is that the barriers to resurgence in the IPO market appear to be lifting. So you can pick your metric, whether it's the Fed, whether it's the NASDAQ. But what we're going to see is likely this backlog starting to clear in 2023 and then moving into 2024. So certainly, it's better to talk about the excitement, but it won't be a straight line as we accelerate.

Great. And then just lastly, I know in the recent past you've talked about Software Sales, you've kind of guided to the next few years, over the next few years, doubling of Software Sales. Is that target we're still sticking to? And what year are we talking about that you can double software sales? By the '25 or fiscal '26, or...

Yes. So I can -- let me start on that, Dave, and then if you want to grab it. So I think if you look at the historical and just when we spun out, we were about $135 million of software revenue, and so you can look at the doubling there over several years. Obviously, given the product line, there's uneven or not a linear progression. So in 2021, I think we're up about 35% in software sales or something in that range. And so as we look forward, the guidance that we've given and Venue, as I've mentioned, sensitive to M&A, is that Venue will have slightly lower growth than the compliance offerings, and we're starting to see the compliance offerings pick up some speed. Obviously, we've talked about the TSR regulation and some additional regulations that will be helpful, with part of the benefit hitting in the software area and part of the benefit hitting in other areas of the company.

Right. So getting to the $600 million in software revenues, that implies a pretty strong growth rate out to -- is that 2025, 2026 time period? And that's all.

Yes, Raj. Sorry. It was top $500 million, and that's in 2026.

Yes, which is where you get to the 55% to 60%, which is the -- of the total or so.

I will now hand the call back over to Dan Leib for any closing remarks.

Great. Thank you, Regina, and thank you everyone for joining us, and we look forward to speaking in the near future. Thank you.

That will conclude today's conference. Thank you all for joining. You may now disconnect.