Donnelley Financial Solutions, Inc. Q1 FY2025 earnings call

• Delivered strong consolidated first quarter results with net sales of $201.1 million, adjusted EBITDA of $68.2 million, and adjusted EBITDA margin of 33.9%.
• Repurchased approximately 5% of the company's outstanding shares in the first quarter.
• Software Solutions net sales represented 42.1% of total net sales, an increase from the prior year, with organic net sales growth of ~6% driven by 16% growth in recurring compliance products.
• Took aggressive actions to downsize print production platform, drive internal efficiencies, and reduce physical footprint to manage cost structure.
• Invested in software offerings and applied automation/AI to modernize operations and support profitable growth, aiming for 60% of total net sales from software solutions by 2028.
• Business is primarily US-based, ~90% revenue from US, ~75% recurring, insulated from current trade pressures.

In the first quarter, Software Solutions net sales were $201.1 million, representing 42.1% of total net sales, an increase of approximately 260 basis points from the prior year. On an organic basis, software solutions had a year-over-year net sales growth of approximately 6%, with recurring compliance and regulatory driven products (ActiveDisclosure and Arc Suite) up ~16% offsetting a decline in the Venue data room. The Capital Markets Software Solutions segment had net sales of $51.9 million, a decrease of $1.1 million or 1.7% on an organic basis from the prior year, with Venue down $3.1 million (-9% y-o-y) and ActiveDisclosure up ~11%. The Capital Markets Compliance and Communications Management segment had net sales of $83.9 million, a decrease of $7.2 million or 7.6% on an organic basis, driven by lower compliance volume. The Investment Company Software Solutions segment had net sales of $32.7 million, an increase of $5.4 million or 20.2% on an organic basis, primarily driven by the Tailored Shareholder Report solution. The Investment Companies Compliance and Communications Management segment had net sales of $32.6 million, an increase of $0.6 million or 2.2% on an organic basis.

• Expect consolidated second quarter net sales in the range of $215 million to $235 million, with the midpoint $225 million implying a ~7% y-o-y reduction.
• Adjusted EBITDA margin expected to be in the mid 30% range.
• Venue expected to decline at a similar rate to Q1.
• Capital markets transactional revenue expected in the range of $35 million to $45 million.
• Compliance based sales in certain segments expected to have a modest year-over-year decline.

• Market volatility impacting capital markets transactional activity.
• Uncertainty in the global operating environment affecting deal activity.
• Potential input cost increases and need to adjust pricing accordingly.

Q: Margins were significantly higher than expected, especially versus guidance, coming in at the high end of the revenue guidance range. Please provide color on what drove that and acceleration of expense reduction efforts.

A: A few factors included better than expected capital markets transactional sales, favorable timing in investment companies compliance volume moving up from Q2 to Q1, and better than anticipated cost reductions including a decrease in bad debt expense of ~$2.7 million.

Q: Provide more color on the segment level assumptions behind the Q2 guidance.

A: Venue expected to decline similar to Q1, ActiveDisclosure and Arc Suite expected to grow, capital markets transactional revenue in $35M-$45M range, and compliance based sales in certain segments expected to have a modest y-o-y decline.

Q: Comment on ActiveDisclosure's differentiation and if it will be a bigger differentiating factor over the next five years.

A: ActiveDisclosure has seen net client growth for seven consecutive quarters, increasing subscription revenue, ACV, and 3-year contracts. It benefits from a hybrid model leveraging software and service expertise, and investments in the platform provide a competitive edge.

Q: Discuss Arc Suite growth sustainability and lumpy factors.

A: Growth is partially due to the Tailored Shareholder Report regulation (lumpy), but also driven by key contract renewals, growth with existing clients, and strong price performance. Core fundamentals of the Arc Suite platform show positive results.