Good day, and welcome to the Donnelley Financial Solutions Third Quarter 2024 Earnings Conference Call. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mike Zhao, Head of Investor Relations to begin the conference. Mike, over to you.

Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions third quarter 2024 results conference call. This morning, we released our earnings report, including a set of supplemental trending schedules 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 further detailed 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, and other members of management. 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 a favorable sales mix driven by double-digit growth, in our SaaS offerings, improvements in both operating cash-flow and free-cash flow and great progress in expanding the adoption of our offerings in the marketplace. Against the backdrop of a soft capital markets transactional environment, which resulted in an 8% reduction in our transactional revenue we delivered solid results. With net sales of $179.5 million and adjusted EBITDA of $43.2 million, resulting in an adjusted EBITDA margin of 24.1%. Which once again demonstrated the resiliency of our operating model across various market conditions and the sustainability of our performance as our business mix continues to transform. Dave will cover our results in more detail, including some items that negatively impacted our year-over-year profitability comparisons. Specific to our third quarter performance, I am pleased with the continued strong demand for our software offerings, where we delivered year-over-year organic net sales growth of 13.6%. A continuation of the strong growth rate we achieved in the first-half of this year. Software solutions net sales represented approximately 46% of total net sales in the quarter, the highest-level we have achieved to date. More significantly, third quarter software solutions sales were, for the first time meaningfully higher than both tech-enabled services and print and distribution sales. As our software offerings serve recurring and reoccurring business needs of our clients, this offers another positive proof point of our progress in transforming DFIN. On a trailing four-quarter basis, Software Solutions net sales reached nearly $322 million, growing 13.1% on an organic basis, from the third quarter 2023, trailing four quarters. And represent 40.1% of trailing four-quarter sales. An increase of approximately 360 basis points from the third quarter 2023 trailing four-quarter…

Thank you, Dan, and good morning, everyone. Before I discuss our third quarter results, I'd like to recap two housekeeping items. First, during the third quarter, we discontinued the use and development of a certain software product and recorded pre-tax charges of $2.8 million related to accelerated amortization of capitalized software and $0.6 million of an impairment charge related to software development costs on assets not yet placed in service, all within the Capital Markets Compliance and Communications Management segment. Second, our effective tax-rate in the quarter was 43.5%, which was driven by increases in both non-recognizable losses and unfavorable discrete tax adjustments combined with the impact of lower pretax earnings. While these adjustments do not impact our forecasted effective tax-rate for the year or our long-term outlook, they did have an outsized impact in the quarter. Collectively, the accelerated amortization, impairment charge and tax-related adjustments resulted in a reduction in GAAP and non-GAAP earnings per share of $0.17 and $0.16, respectively but had no impact on third quarter adjusted EBITDA, adjusted EBITDA margin or cash-flow. Next, as Dan referenced, there were a handful of items that impact year-over-year comparability. Specifically, a reduction in compensation-related accruals during the third quarter of last year benefited last year's third quarter by approximately $4 million. In addition, higher compensation related accruals related to 2024 performance resulted in approximately $2 million of incremental expense being recorded in this year's third quarter. Combined, these items negatively impacted year-over-year comparability by approximately $6 million in adjusted EBITDA across all four operating segments as well as corporate with most of the year-over-year impact being reflected within SG&A. Turning to our third quarter results. As Dan noted, we continue to experience positive momentum in the adoption of our software solutions, which increased by 13.6% on an organic basis…

Thanks, Dave. The execution of our strategy continues to deliver positive results and further demonstrates DFIN's ability to perform well in varying market conditions. Our solid financial profile provides us with the foundation to continue to execute our strategic transformation. We are in the midst of preparing our 2025 operating plan. In 2025, we expect to realize additional year-over-year benefits from tailored shareholder reports, continued operational transformation and the execution of our strategy. Consistent with past practice, we expect to provide an update on 2025 and guidance for the first quarter in February. 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] And your first question comes from the line of Charles Strauzer from CJS Securities, Inc. Your line is open. Charles, your line is open.

Sorry about that. It was on-mute there. Good morning.

Morning, Charlie.

If you could talk a little bit about EBITDA margins in the quarter and more maybe some more color there in terms of the items that impacted your year-over-year comparisons versus Q3 of last year and also what you're kind of assuming what kind of assumptions are you assuming in Q4 guidance? Thanks.

Yes, Charlie, it's Dave. I'll take that one. Thanks for the question. So we talked about it in the prepared remarks on a year-over-year basis, there was about $4 million of benefit that was reflected in Q3 of 2023's results and about $2 million of incremental expense the -- in Q3 of '24 related to 2024 performance. So just some, some anomalies on the timing there in terms of overall margin and the impact as it relates on a year-over-year basis. I think also from a sequential perspective, Q3, or I should say Q2 is typically our highest-margin quarter and that's really a result of the operating leverage given the seasonality of our top-line. So we typically do see lower-margin in Q3 compared to Q2, obviously, some of the relative impact from '23 relative to '24 was exaggerated by some of these compensation-related items that I mentioned. The second thing I would also say some of the -- in addition to these items, when you look at the combination of Q2 and Q3, EBITDA margin is close to 31% this year. And then when you compare that to the same periods over the last couple of years, that margin is up a couple of hundred basis points. Looking back to 2022, the combined quarters were about 28%, just over 28% and last year about 29.5% and again, that's close to 31% this year. So some noise from quarter-to-quarter, but we feel really good about the direction of margins and our long-term guidance there of 30% plus percent. Specifically, as it relates to Q4 guidance, the assumption there, we outlined the impact of transactional in capital markets down a couple of million dollars relative to last year. Certainly the impact of some of the onetime items that we had last year, which amounted to about $7.5 million within the two investment companies segments. By the time we get to Q4 margin our guidance in the low 20% range is pretty consistent with what we delivered in Q4 of last year.

Got it. Great. And just one housekeeping item on D&A in the quarter that seemed to tick-up a little bit sequentially and year-over-year. Any color on that?

Yes. I would point back to one of the housekeeping items that I noted in - at the beginning of my prepared remarks, we accelerated amortization of an asset, that we're no longer using and that was about $2.8 million of accelerated amortization there.

Got it. And how should we think about modeling that going forward?

I would -- yes, you could strip that out. That was a one-time acceleration. And so you know, I would go back to kind of what the normal run-rate had looked like historically.

Great. Thank you very much.

Yep.

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

Hi, good morning, gentlemen. Thanks for taking the call.

Good morning.

A few questions. And I was having just a little bit of trouble taking all the notes on the call, lot of information. But can you give us an update on tailored shareholder reports and kind of put the -- update us on the brackets around kind of the full-year benefit that you're expecting and how that's evolved over the last three or four quarters?

Okay. Yes, you cut -- it's Dan, you cut out a little -- I think, I got the question was an update on tailored shareholder reports.

That's right. Sorry, I don't have the best signal here, but yes, just -- I think you said that $11 million to $12 million and kind of how do you expect that to roll-out?

Yes, exactly. So it's $11 million to $12 million recurring software revenue, half of that we realize in 2024 and then we should realize the full $11 million to $12 million in 2025.

Okay. And so the print portion of it, I think you had said previously that some of your competitors were going out with some very competitive pricing, and I assume that's consistent. And so you don't expect much of a print benefit from PSR then?

That's correct. Yes, we saw some pickup as we mentioned in the script and then there is a regulation change that reduces the amount of print necessary just in-going to a shorter form. So that's a net reduction off of any pickup.

Okay. Okay. And then, within capital markets transaction revenue, I think it was down $2 million year-over-year. Just noting that the number of IPOs you retained on was up. It looked like M&A and debt issuance was up. Would you attribute some -- at least a portion of the lower revenue to a lower level of de-SPAC merger transactions?

Yes, this is Craig. Thank you for the question. I think, the overall market we said was up. We had some larger deals in 2023. So some comps there. As you look at-the-market from a total perspective, we said the beginning of the year, the IPO market wouldn't be a straight-line recovery and that certainly hasn't been the case. The interest rate cut last month from the Fed didn't do much to turn the tide for IPOs, despite equity being at an all-time high. The VIX was in a range for conducive to IPOs. But as we stated, there were very few that raised over $100 million. When you look in the quarter, July started out strong. There were seven IPOs that raised over $100 million. It was led by Lineage. We were proud to support Lineage as they raised $4.4 billion near the high-end of the range. But this positivity on the market didn't last. The market stumbled in early-August with economic weakness and then post Labor Day, we saw more clients who were turning to 2025 for their pre-IPO look. So, we have seen large issuers joining the pipeline. So, we'd 15 companies that joined the IPO pipeline, which is slightly below prior quarters. And then, what we've seen in October, so as we look at Q4 is a busier month. There were 10 marquee IPOs that priced. We were fortunate to have supported eight of those 10. There should be just a handful more IPOs in November and December. And if Q4 ends as we think, we should have a year that has about 69 IPOs, so this would be more than 2022 and 2023. But to add context to Dave's comments earlier, there were just 40 last year. There were 27 in 2022 and the 20-year average is 254. So the longer-term outlook for IPOs is more promising. Morgan Stanley on their earnings call, their CEO talked about the surge that they expect in 2025. There's still obviously room for skepticism as the U.S. election will provide hopefully some clarity and the market is looking for certainty around regulatory as well as economic policy. So as you relate back to the quarter, a few more, it's the mix of those and then the lower, you know per debt invoice, the debt doesn't make-up for that and then M&A is certainly still suppressed. So, it only takes a few and you've heard the market is sort of ready for change and we have a robust pipeline of companies who filed confidentially or are planning to file as well as a strong pipeline of IPO RFPs. So, I think another piece is as this normalizes this event-driven transactions, it's a pipeline for our reoccurring software and contracted software. So, it leads to Venue, it leads to ActiveDisclosure, pre-IPO as Dan talked about IPO and certainly post-IPO work. So, thank you for the question.

Yes, Craig that was a lot of great detail. Thank you for the update. I'll get back in the queue.

Your next question comes from the line of Sam Salvas from Needham & Co. Your line is open.

Hi, guys. Just jumping on for Kyle here this morning. Wanted to dig into Venue. It was good to see another quarter of strong growth. But and I know you guys mentioned a tough comp from last year, but I did want to just touch on the decel which was pretty sharp. Are there any changes in the market you're seeing in terms of competitive dynamics and any lock-up in the market given the uncertainty around the election or anything like that that maybe contributed to the decel this quarter?

Yes. I'll start and then maybe. We've pointed towards some of the larger projects and I think that had taken place earlier in the year and the expected tougher comps given our improvement in performance late last year. And then, to your question on the market, there's not great market information in terms of how other companies are performing, but we have seen at least one or two and feel like in a 27% increase in revenue that we are taking some share and the market remains consistent with frankly what we've seen earlier in the year. And so, Craig, anything to add?

Yes. So, I appreciate the question. You know, certainly that type of growth in Q1 and Q2 is hard to sustain. And as we said, we had tougher comps, we have tougher comps coming up in Q4 and then certainly as we get into 2025. We're proud of the quarter and we think to build on Dan's points, we drove higher page activity, higher pricing, we're seeing still sluggish M&A demand, but we believe the continued sales execution, which has resulted in several large projects driving some significant revenue in Q3 will continue. So, we feel great about the position we're in. The product that we have, the sales team that we have, the broader application within the M&A ecosystem that's serving both announced and unannounced deals across public and private companies is resulting in a more resilient, stable demand. So, we think as we look into 2025 and hopefully getting back to a median level of activity, the demand for assets will be high, private-equity will be back. There's a large amount of capital looking to be put to work. We're pleased with our results. We're pleased with the pipeline and we are going to continue to execute what got us here, which is great product, sales execution and share expansion.

Got it. That's super helpful. Appreciate the color on that. And then, just as we think about the fourth-quarter and maybe the next few quarters, in terms of the software business and growth there, how are you guys thinking about price versus volumes, new sales, etcetera, you know, near-term?

Yes, Sam, it's Dave. We haven't broken that out specifically, but I would say, I'd point to a couple of items. I think when we look at our long-term contracts, certainly there are customary price escalators there. You know, we've seen historically in Venue kind of moving up to a more market-based price, which has driven a lot of the growth over the last year, but still some opportunity there as well. Probably the one-item to point to that's a little bit unique is the tailored shareholder reports impact. And as Dan mentioned earlier, right, $11 million to $12 million, most of that on an annualized basis, most of that hits within software. And so with half of it coming this year and then getting the second-half benefit into, into next year.

Got it. Okay. Thanks, guys.

Thank you.

Your next question comes from the line of Raj Sharma from B. Riley. Your line is open.

Thank you for taking my questions. On solid growth in software, especially Venue again and just kind of following-up. Can you provide some more color on the Arc Suite, the better growth you're expecting in Q4, if I heard that correctly?

Yes, Raj, I think what we said there was a continuation of the better growth that we saw in Q3 relative to the first-half of the year will also hit in Q4 and that's the point I just raised regarding tailored shareholder reports, right? So, we saw the benefit in Q3. We'll continue to see the benefit in Q4 and then also in the first-half of 2025 since that regulation was effective -- became effective in the third quarter.

Got it. Got it. Thank you. And then can you -- can you comment on the ongoing operating expenses, the spend on the software in Q4? Is that higher, lower?

Yes. I would -- there's always -- again some timing changes and modest variances from quarter-to-quarter. But I think you know largely from a modeling perspective, you know, whether you're looking at Q4 longer-term, you know, I think it's making an assumption something similar to run-rate is the right way to look at it.

Got it. So no real change on that. And then, can you give a little bit more color, the tax impact again in Q3 that led to the $0.17 charge, the -- can you clarify that again, please?

Yes. And so let me clarify that. So, I addressed it in the prepared remarks as one of the two housekeeping items. The tax -- the tax-rate was 43.5%, really a combination of two things. There were some with the way the tax laws work, some non-recognizable losses, right? So, you don't get the tax benefit associated with those losses and then some discrete tax adjustments. You combine those two things with the modest pre-tax earnings and it has kind of an outsized impact on the tax-rate at 43.5%. I should -- I should also clarify that I -- within the $0.17, about $0.09 is related to those tax adjustments. The other $0.08 impact was the combination of the accelerated amortization and the related impairment charge on the asset that we took out-of-service and wrote down.

Got it. And just I think, I missed the point on the call where you were talking about the guidance for the fourth quarter. Could you mention that again, please? For revenues?

Yes. So baked in our guidance for Q4 is that transactions will be down a couple of million dollars relative to Q4 of last year. I think, also when you look at the guidance relative, or our guidance and compare that to Q4 last year, we did have about $7.5 million of one time revenue related to a regulation change in the EU and that impacted the investment companies segments. Mostly the Investment Company's Compliance and Communications Management segment.

Right. And so the range is for 4Q?

So $170 million at the midpoint, the range we gave was $165 million to $175 million.

And then low '20s EBITDA margins?

Yes, and that's pretty comparable to what we did in Q4 last year.

Got it. And just lastly for me, the cadence so-far on transactions business in Q4?Anything unusual or?

You know, I'd say nothing unusual. Obviously, we have a view of the October activity and certainly that gets kind of baked into our guidance for Q4. So, I'd say at a high-level, more of the same of the environment still being relatively soft, certainly compared to historical levels.

Great. Great. Thank you for taking my questions. I'll take this offline. Thank you.

There are no further questions at this time. So, I'd like to hand the call back over to Dan Leib for closing comments.

Great. Thank you, and thank you, everyone, for joining, and we'll look-forward to speaking with you soon.

That does conclude our conference for today. Thank you for participating. You may now all disconnect.