Donnelley Financial Solutions(DFIN) - 2022 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported third quarter net sales of $188.7 million, a decrease of $59 million or 23.8% from the same quarter in 2021 [43] - Adjusted EBITDA for the third quarter was $45.3 million, a decrease of $37.2 million or 45.1% from the third quarter of 2021, with an adjusted EBITDA margin of 24%, down approximately 930 basis points from the previous year [50][52] - Non-GAAP gross margin was 55.5%, approximately 690 basis points lower than the third quarter of 2021, primarily due to lower sales volume and an unfavorable business mix [48] Business Line Data and Key Metrics Changes - Software Solutions net sales for the quarter were $69.5 million, a slight increase of 0.3%, with recurring compliance offerings showing positive sales momentum [44] - ActiveDisclosure grew 10.6% in the quarter, marking the seventh consecutive quarter of double-digit sales growth, while Arc Suite net sales grew 11.8% driven by subscription revenue growth [45][66] - Venue sales were down 11.4% year-over-year due to a weak capital markets transaction environment, although it grew sequentially from the second quarter [26][28] Market Data and Key Metrics Changes - The capital markets transactional environment saw a nearly 50% reduction in transactional revenue compared to the previous year, with IPO activity down more than 90% year-over-year [8][34] - The M&A market was down more than 30% year-over-year, with very few large deals being completed [34][59] - The company noted that the IPO market was largely frozen, with only five priced IPOs over $100 million taking place on US exchanges compared to 150 in the same quarter last year [59] Company Strategy and Development Direction - The company is focused on transforming into a software-centric business, aiming to achieve 55% to 60% of revenue from software solutions by 2026 [12][13] - Cost management actions have been taken to optimize the cost structure, including downsizing print production and reducing the global real estate footprint [14][15] - The company is well-positioned to leverage its software offerings and domain expertise to address market needs related to future regulatory changes [25] Management's Comments on Operating Environment and Future Outlook - Management acknowledged a challenging operating environment but expressed confidence in the company's strong market position and client relationships to support future capital markets transactional needs [35][85] - The company expects market volatility to continue impacting the capital markets transactions environment in the near term, with fourth quarter net sales guidance in the range of $170 million to $190 million [77][78] - Management remains optimistic about the opportunities ahead to generate increased value for customers, employees, and shareholders [85] Other Important Information - Free cash flow in the quarter was $68.7 million, a decrease of $31.7 million compared to the third quarter of 2021, reflecting lower adjusted EBITDA and additional capital expenditures [73] - The company repurchased approximately one million shares of common stock during the third quarter for $32.3 million [76] - The company was recognized as a great place to work and named to Newsweek's list of the 2022 Top 100 most loved workplaces in America [37][38] Q&A Session Summary Question: Was the shortfall in the quarter primarily related to transactions? - Management confirmed that the shortfall was substantially driven by transactional revenue declines [88] Question: How can the company maintain margins in the mid-20s range going forward? - Management indicated that maintaining margins will involve disciplined cost management, shifting sales mix towards software, and exiting lower-margin print work [90][91] Question: What are the cash flow expectations for Q4? - Management expects cash flow to be similar to last year's level, with lower tax and interest payments offsetting lower EBITDA [93] Question: What was the impact of foreign exchange in the quarter? - The foreign exchange impact was small, with reported sales down 23.8% and organic sales down about 23% [96] Question: How does the company view the new SEC rule on tailored fund reports? - Management believes the new rule aligns with their existing tech-enabled solutions and will not significantly impact print revenue [100][101] Question: How did the company perform compared to the overall industry in transactions? - Management noted that the company performed better than the market, with a robust pipeline of IPOs and M&A despite the overall decline [106]