Donnelley Financial Solutions, Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Strategy Validation: Fourth quarter results validated the strategy with improved sales mix, solid growth in software solutions net sales (driven by SaaS compliance), and progress in market adoption.
• Software Solutions Growth: 2024 software solutions organic net sales growth was 13.8%, with software solutions becoming the largest component of total net sales for the first time. Full year 2024 software solutions net sales were ~$330 million, a 13.8% increase from 2023.
• Venue Performance: Virtual data room offering (Venue) grew ~26% year over year in 2024, reaching a record revenue of nearly $140 million.
• Compliance Software Growth: Active Disclosure and ArcSuite showed double-digit growth in the fourth quarter, with ArcSuite full year net sales at ~$116 million (+8.7% Y/Y).
• Cost Management and Capital Allocation: Focus on accelerating business mix shift, managing costs, and disciplined capital allocation, including share repurchases and net debt reduction.

Segment Performance

• Capital Markets Software Solutions: Net sales were $50 million, an increase of 5.7% on an organic basis from the fourth quarter of the prior year. Recurring compliance product Active Disclosure increased ~12% in the fourth quarter. Venue sales were up $0.7 million or approximately 2% year over year, with full year net sales at ~$138 million and a 26% growth versus 2023. Adjusted EBITDA margin was 26.6%, an increase of approximately 10 basis points from the fourth quarter of 2023.
• Capital Markets Compliance and Communications Management: Net sales were $53.3 million, a decrease of $15 million or 22% from the fourth quarter of 2023, primarily due to lower event-driven transactional revenue. Adjusted EBITDA margin was 25.5%, a decrease of approximately 520 basis points from the fourth quarter of 2023.
• Investment Company Software Solutions: Net sales were $31.6 million, an increase of $5.9 million or 23% versus the fourth quarter of 2023, driven by revenue from the tailored shareholder report solution. Adjusted EBITDA margin was 37%, an increase of approximately 550 basis points from the fourth quarter of 2023.
• Investment Companies Compliance and Communications Management: Net sales were $21.4 million, a decrease of $13.1 million or 38% from the fourth quarter of 2023, driven by lower print and distribution revenue. Adjusted EBITDA margin was 22.4%, a decrease of approximately 770 basis points from the fourth quarter of 2023.

Guidance

• Q1 2025 Outlook: Expected consolidated net sales in the range of $190 million to $200 million and consolidated adjusted EBITDA margin in the mid-twenty percent range. Transactional sales assumed at ~$45 million in Q1, a decrease from Q1 2024 but an increase from Q4 2024.
• 2025 Capital Spending: Projected capital spending between $65 million and $70 million, predominantly for development of software products and underlying technology.
• Capital Deployment: Continued balanced approach toward capital employment, including organic investments, share repurchases, and net debt reduction.

Risks

• Macroeconomic Factors: Macro headwinds, market volatility, and geopolitical factors continuing to weigh on deal activity recovery.
• Transactional Market: Continued muted deal activity impacting transactional revenue.
• Print and Distribution: Secular decline in print and distribution sales, with variances from baseline due to market activity changes.
• Regulatory Uncertainty: Uncertainty around timing and impact of future regulations, though DFIN leverages its platform to address them.

Question and Answer

• Q: Color on results vs guidance and key drivers behind differential.

A: Dave Gardella stated capital markets transactional revenue was off $10 million from guidance, with incremental margins on that work typically in 50%-60% range impacting EBITDA margin variance.

• Q: Comment on regulations, ESG in US and EU.

A: Dan Leib and others discussed assessing proposed regulations, leveraging platform for quicker market entry, minimal impact to DFIN from ESG regulations, and using platform for disclosure solutions.

• Q: De-SPAC headwind duration.

A: Craig Clay said de-SPAC market is at tail end, prioritizing quality deals due to depleted trust and poor financing in past deals.

• Q: Pace of print and distribution in 2025.

A: Dave Gardella noted print revenue has a secular decline in 4%-5% range, with variances from baseline due to factors like special proxies.

• Q: Capital allocation and pension annuitization.

A: Dave Gardella mentioned capital deployment priorities (investing, repurchasing shares, net debt reduction) and pension termination on track to be done by end of 2025 with no cash contribution estimate yet.

• Q: Insight on Q1 2025 guidance confidence.

A: Dave Gardella and Craig Clay discussed variability in capital markets transactional activity, early positive signs in IPOs in January, but continued uncertainty around deal timing and market direction