Donnelley Financial Solutions, Inc. Q3 FY2024 earnings call

• Third quarter results validated the strategy, with favorable sales mix driven by double-digit growth in SaaS offerings, improvements in operating cash-flow and free-cash flow, and progress in expanding adoption. - Software solutions net sales grew 13.6% organically, with Software Solutions representing 46% of total net sales in the quarter. - Venue posted approximately 27% sales growth. - Arc Suite saw incremental software revenue from tailored shareholder report solution, on track for $11M - $12M incremental recurring software revenue full-year. - ActiveDisclosure's subscription component grew, though Section 16 filing activity was impacted by weak IPO market. - Print and distribution revenue declined by $4.3 million or 16.3% year-over-year. - Discontinued a software product, recording pre-tax charges of $2.8 million for accelerated amortization and $0.6 million impairment charge. - Effective tax-rate in the quarter was 43.5% due to non-recognizable losses and discrete tax adjustments.

In the third quarter, Software Solutions net sales represented approximately 46% of total net sales, with year-over-year organic net sales growth of 13.6%. Capital Markets Software Solutions segment net sales were $53.3 million, an increase of 16.8% on an organic basis from the third quarter of last year, driven by Venue's 27% sales growth. Capital Markets Compliance and Communications Management segment net sales were $63.5 million, a decrease of $6.6 million or 9.4% from the third quarter of 2023. Investment Company Software Solution segment net sales were $28.9 million, an increase of 8.2% versus the third quarter of 2023. Investment Company's Compliance and Communications Management segment net sales were $33.8 million, a decrease of $2.9 million or 7.9% from the third quarter of 2023.

• Expected consolidated fourth quarter net sales in the range of $165 million to $175 million, with adjusted EBITDA margin in the low 20% range. - Capital markets transactional sales expected to be approximately $48 million, down approximately $2 million from last year's fourth quarter. - Intend to settle defined benefit plan by offering lump sum distributions and purchasing annuity contracts, with expected cash contribution in 2025.

• Soft capital markets transactional environment led to 8% reduction in transactional revenue. - Decline in print and distribution revenue due to secular decline in demand for printed products and tailored shareholder reports regulation. - Uncertainty around the termination of the defined benefit plan, including market conditions, cash payments required, and regulatory review.

Q: Talk about EBITDA margins in the quarter and assumptions in Q4 guidance A: Dave mentioned about $4 million benefit in Q3 2023 and $2 million incremental expense in Q3 2024 related to compensation timing, Q2 is typically highest margin, combined Q2 and Q3 EBITDA margin close to 31% this year, Q4 guidance in low 20% range due to transactional down and one-time items impact Q: Color on D&A ticking up A: Dave pointed to accelerated amortization of $2.8 million for an asset no longer in use Q: Update on tailored shareholder reports and full-year benefit A: Dan said $11M - $12M recurring software revenue, half in 2024, full in 2025, print portion reduced by regulation change Q: Capital markets transaction revenue down, attribution to de-SPAC A: Craig Clay said overall market up but some comps, IPO market not straight-line recovery, interest rate cut didn't help much, Q4 has busier month but longer-term IPO outlook promising Q: Venue growth decel, market dynamics A: Dan said larger projects earlier and tough comps, Craig Clay said growth hard to sustain, but sales execution continues, product and team strong Q: Software business growth, price vs volumes A: Dave said long-term contracts have price escalators, Venue moving to market-based price, tailored shareholder reports impact on software growth Q: Arc Suite growth in Q4 A: Dave said better growth in Q4 continuing from Q3 due to tailored shareholder reports benefit Q: Ongoing operating expenses on software in Q4 A: Dave said largely similar to run-rate, modest variances Q: Tax impact in Q3 A: Dave clarified tax-rate 43.5% due to non-recognizable losses and discrete tax adjustments, $0.17 EPS impact from tax and asset charges Q: Fourth quarter revenue guidance A: Dave said midpoint $170M, range $165M - $175M, transactions down couple of million vs last year, one-time revenue impact in investment companies segments Q: Cadence of transactions business in Q4 A: Dave said nothing unusual, environment still soft compared to historical levels