Thanks for coming to the Needham growth conference. My name is Sam Salvas. I'm on the Fintech Equity Research team here at Needham. And today we have Dan Leib and Dave Gardella, the CEO and CFO of DFIN. Here, guys, appreciate you guys coming, making the trip out here. We're gonna do a fireside chat. So I guess to start off, you know, maybe just give us an overview of DFIN, you know, history of the company, the spin you guys went through, and, you know, kind of the evolution of the company since then.
Great. First off, thank you for having us, and thank you everyone for joining us. So we help clients, predominantly corporations and mutual funds, comply with SEC regulations, and that's centered around compliance activities and then also completing deals. The client base is the majority of the Fortune 1000 and the vast majority of mutual funds, regulated insurance companies. Within those entities, we interact with finance, legal, compliance organizations, and then we also work with investment banks and law firms as influencers, excuse me, in the decision making. The business is really centered around data management. So if you think about documents, tagging of data within the documents, and then filing to the SEC, and then all the related calculations around that, and all the related process management around that.
As Sam mentioned, we spun out from R.R. Donnelley in 2016. We had a strategy at the time of defending our core offerings. So we're number one, two, or three in all of our product lines. We had a different offering that we weren't number one, two, or three, and we divested that. We also changing the mix of business, so becoming much more software-centric and service-centric. And we've made really good progress along both those dimensions. The last was changing the culture, which obviously is a longer term type of objective, but again, we've made great progress there. I'd also in a rule of three say that we had three challenges at the time of spin. So one is we had too much debt, which we've taken the debt down.
At this point, we're less than one times levered. The second was we had a lot of revenue that came from printing. That has also changed. We've taken that down as well. Print is less than 20% of our overall revenue at this point. And we've proven that we get paid for everything else I described. The print is, you know, when it's there, we're making sure we're making a reasonable return on it, and Dave will talk more in our cost savings about how we've changed our platform, variabilize the cost structure, et cetera. And the third was, we had a lot of our revenue that came from, corporate transactions, which has a lot of volatility towards it or, or within it.
And, you know, I think, while I wouldn't wish these past 24 months or 18 months on anyone that's levered to corporate transactions, I think we've proven and demonstrated that the business, with all of our investment going into our recurring offerings, the business is just much more fundamentally stable at a higher margin rate than it's been historically. And at this point, trailing 12 months, event-driven, which is what we call the transactions, represents about 25% of our revenue.
Great. Yeah, that's a helpful rundown and background of the company. I guess before diving deeper into the business, you know, could you just give us a layout of what the competitive landscape looks like, and, you know, why you guys are able to, you know, maintain such a strong foothold in the markets you play?
Yeah, absolutely. So as I mentioned, we're one, two, or three in all of our offerings. And I think what differentiates us, and obviously, we've seen a lot of competitors come in, and they do certain things, but no one's got the full breadth of service, and offerings. So we can take a client from their infancy all the way through their growth phases, M&A, all of those sorts of activities, going public, et cetera. And what supports that is great software offerings, but also importantly, great service offerings. And so some of our clients and our product lines, if you think about where they serve within a corporation, in the back office or the middle office, oftentimes, we're helping our clients with their processes, particularly within the investment companies area or mutual funds.
We do a lot of the service. It's a complex ecosystem, and what that's afforded us is we're able to learn on where our clients are struggling. We're able to then bake that into the software when we get the standard operating processes, and then also able to guide clients on what's a better way of working that will drive more productivity for them. So I think our end-to-end offerings, and in fact, why print remains, is it's not a print business, it's an offering to clients to take them from, you know, lack of a better analogy, batteries included. So if you have an IPO, and you want to do an IPO, and you wanna distribute any amount of it in print, we can help you through that process rather than only taking you halfway.
I think that those differentiators around service and the full end-to-end have really served us well.
Yeah, that makes sense. And then, I guess just diving a little deeper into the business, maybe give us just a quick overview of some of the software solutions you guys offer between, you know, ArcSuite, ActiveDisclosure, you know?
Sure, yeah, I'll hit each one briefly. So the first one mentioned was ArcSuite, which is really an offering for the fund space, and it's got four different modules to it. But we help clients with their compliance requirements for funds, and we call it the '40 Act business. And that has had really nice, strong growth and increases in profitability over time. As I mentioned, really a strong service component behind that. And one of the areas—there's right now regulation in the market, which is Tailored Shareholder Reports, which is a regulation that comes into effect in the middle of 2024. And it's a great example where mutual funds are now going to need to file information at a share class level rather than a fund level. So that increases the number of units, right?
Because there's multiple share classes within a fund. And it's got requirements that span from all the things I mentioned: document management, tagging, filing, and it also spans from software service and distribution. So our ability to go to a client and put forth the one-stop shop is really a differentiator for us. We went out with our Alpha software product in October, really well-received, and, you know, as I mentioned, expect that to go into effect mid-year. Second, Active Disclosure, brand new build in 2021. By 2023, we're off of the old platform, so we decommissioned the old platform. The software that we have in the market is the newest, most modern to help corporations file with the SEC for their K's and Q's and things like that. It's obviously.
That's going really well. We have in the transition, as clients have moved, pricing's gone up by mid-teens, and then the term of contract has gone up from an average of 12 months to 30 months. So we've seen that product, and it is a specific use case product at this point. So it is for filing with the SEC, those compliance documents. There are a lot of broader use cases, and we have an option now to expand into those, but we had to build the foundation first, and we're now getting past that. The last one that I'll talk about is Venue, which is a data room product. And what we found is the Venue product, much more stable offering than a corporate transactions offering.
And the reason for that is, our corporate transactions offering is really public companies that really thrives when it's public to public, thrives when it's a stock deal. You think about the Venue data room can be any sort of deal, and it's not only deals that get completed, it's also deals that are being worked on in the diligence process. And so that, we're third in that market. We've seen really strong performance. Our product is good. We're investing behind it. But, you know, sales and marketing have done a fantastic job in that offering.
Yep. Okay. And just, you know, a quick follow-up on the Venue product.
Mm-hmm.
You know, obviously, that's done much better than the broader M&A market. You know, is that a matter of share gains, or can you talk a little bit more-
Sure.
about the success there?
Yeah, the two largest are not public, or at least one's a division of a larger public company. So we don't have great visibility. We do—we have some, and what we've observed is our product is the most leveraged to M&A. So you go back to 2021, and in the halcyon days of M&A, we grew in the 40-some-odd% range in Venue, and that far exceeded others in the market, at least what we have visibility to. And we've now, in the past year, we're—we actually have some growth despite the fact that M&A is down, and we believe that is share take, especially given how leveraged we are to M&A.
And, you know, again, representative of all the dynamics I spoke of in terms of it can be deals that aren't completed, just worked on, and broader use case. But we believe we're, we're doing well and taking share there.
Mm-hmm. Okay. Yeah, that's helpful. And then wanted to touch on. You guys have hinted a lot about kind of the single compliance platform-
Yeah
where you can, you know
Yeah
provide your services to all your customers.
Yeah
from one platform.
Glad you asked. I should have mentioned that with the product. So, you know, we talk about ActiveDisclosure, we talk about Arc Suite as compliance offerings, and so they have those two, as well as some of our more historical manufacturing systems, have a lot of common capabilities. So we're in the process, and as we built ActiveDisclosure, built it in such a way that we can leverage common, what we call, services across various products, while maintaining the specific segment requirements or capabilities necessary to serve clients. There are different requirements in a mutual fund than there are in a corporation. But by building the common services and leveraging those, we get the latest technology, and we also get much faster speed to market. And so the platform creation, we're well along the way.
Actually, TS, the Tailored Shareholder Reports that I mentioned, benefits from having done the work in ActiveDisclosure. We probably have another 18 months or so in building the platform, and once the platform is built, I think to clients, it will be, they won't know the platform's there other than they'll see much quicker speed to market, and we'll have the ability to expand use cases in a much more, economical and faster way.
Mm-hmm. Okay. Yeah, that's helpful. And can you, I guess, talk about, you know, any of these new potential use cases and maybe, you know, to the same extent, talk about any new product development-
Sure.
efforts you guys are focused on?
Yeah, a few things. So we, we benefit from our position in the market where, in general, different governments will change regulations. In general, it's up and to the right, right? So there's always more regulation. And so, you know, TSR, Tailored Shareholder Report, is a great example of new regulation comes into market, creates a great market opportunity for us. There's a few others that have come out recently, and I'll, I'll talk about them just to distinguish. So Pay Versus Performance came out last year, new proxy regulation. That one's really just more disclosure. So we'll have a slight uplift because we're helping clients with their disclosure needs and, and there's some, you know, slightly additional disclosures. Tailored Shareholder Reports, brand-new regulation, big opportunity.
And then there's something like the Financial Data Transparency Act, which is, different agencies of government requiring also data tagging, to in order to communicate with their constituents. And so we, you know, those opportunities will present themselves to us all the time. In addition, obviously, we're on the offensive, looking at different use cases and our ability to expand, but again, leveraging off of those core capabilities of our products. And, you know, being in that position where the platform is built and established and allowing ourselves higher velocity into market also allows us. But it'll be along the, regulatory and compliance area.
Mm-hmm.
In terms of new technologies, so, you know, we've had AI or ML within many of our products going back in time. We continue to look at opportunities. They span internally focused and productivity types of opportunities, as well as market opportunities. Given the product line that we have and given what we do for clients, we are incredibly sensitive to security. So, you know, we have a lot of work going on, but we're also gonna make sure before we roll anything out, that the security and there's no cross-data contamination. And so, you know, a lot more to come, but a lot of work going on in those areas.
Mm-hmm. Yeah, that's a helpful rundown. Then I just wanted to follow up on some of those regulations you mentioned-
Mm-hmm.
That obviously, you know, regulations are always changing. But is there any way for investors to kind of quantify how big some of these opportunities are, or what the impact could be?
Sure.
on the financial model?
Yeah, well, there are, you know, even in the Tailored Shareholder Reports, the SEC took a crack at sizing, you know, different. Here's, here's what it will cost the industry to comply. That's not all relevant to us, but it's, it was a relatively big number. But so there is, you can do fundamental research and look at the regs passing with the SEC. We've come out and said, you know, we'll a month from now in February on our earnings call, we'll size the Tailored Shareholder Reports for, for everyone and what we think that means for us. And then along the way, we've sized these. So it's. I think it's at the level of speaking to companies in the space and/or, you can go directly to the source and the SEC.
Mm-hmm. Okay. Got it. And then I think you said 25% of the business today is transaction-based. Obviously, you know, the transaction market has changed a lot over the past couple of years. So maybe if you guys could talk a little bit more about how you manage that portion of the business and, you know, also maybe what your expectations are, you know, as we head into 2024.
Yeah, sure. I'll take that one. You know, to your point, the transactional market really has evolved over the last few years. We saw a peak revenue number of just over $400 million in 2021. That's down to, and based on our fourth quarter guidance, less than $190 million of revenue for us in 2023. As Dan mentioned earlier, though, what we've done with the cost structure, both in terms of, you know, the reducing the internal cost, cost footprint, as well as, variabilizing a lot of the costs that are specific to the transactional work, has really paid benefits for us in terms of overall margin.
You look back at, you know, four or five years ago, probably 2018, 2019, EBITDA margins were in the mid-teens, and even at this low, level of transactional environment, we're now in the mid-twenties. Have long-term guidance out there to continue to expand margins as the, not only as the software business continues to grow and we get the operating leverage there, but also, you know, we're very, very well-positioned when the transactional market does come back, even to a more normalized level, to capture incremental profitability there.
Yeah, that's another thing I wanted to hit on, is you guys have done a really impressive job, you know, managing margins throughout the kind of tough operating environment over the past couple years. You know, I guess before we dive into some of the levers a little bit deeper, could you talk about what the margin profile looks like across the software business, you know, tech-enabled solutions? And I know the print and distribution business is, you know, getting smaller, but it's still there right now, so.
Yeah. And I should clarify, when we think about those three components of our revenue, we don't necessarily think about each as standalone businesses. To Dan's earlier point, they're part of a one-stop shop, so to speak, depending on the client needs. But you know, still we do look at margins at that level, at least, you know, from a gross margin perspective. And again, I'm leaning on a lot of the things that I just pointed to in terms of you know, being aggressive in managing the fixed cost structure. And then also, you know, variabilizing the piece for transactional has really yielded improved gross margins in each of those three areas.
Going back from 2019 to trailing four quarters, you know, we've gone from, you know, in print as an example, from about 20% now at about 40%. And, you know, that's eliminating the fixed cost structure, that's having much more pricing discipline on the work that we are accepting and, you know, getting good margin improvement there. I think when you look at, you know, pretty similar story to a lesser degree on the services business, gross margins have expanded by about 1,000 basis points, from 50% or so to just north of 60%. And then, you know, similarly on the software business, and we, this is where we, you know, continue to expect more margin expansion as we grow that business.
The gross margins in software have gone from about 45% in 2019, and are now north of 60%. And even within each of the software products, you know, we have various levels of maturity. Dan commented on some of them, you know, Venue probably being the most mature and having, you know, gross margins and EBITDA margins that are representative of what you would think a SaaS business would generate. ActiveDisclosure is probably on the other end of that spectrum, you know, just given all the investment that's going in, and then ArcSuite, somewhere in between. So feel good about the progress that we've made and the momentum that we have going forward.
Hmm. Okay. Yeah, and just I guess just one more there. You know, obviously, if the transactions market comes back, you know, that's great for the revenue base, but could you talk about what that impact would have on, on the margin profile?
Yeah, and we all hope that the transactions does come back. And, you know, Dan pointed out earlier, I think, you know, having the tide go out in transaction has really, kinda proven all the work that we've done over the last several years in terms of balancing the mix of revenue, managing the cost structure very aggressively. You know, we would look at incremental margins in the 50%-60% range on new transactional work. You know, specific to the cost coming back, I mentioned, it's mostly variable. There's nothing, you know, structurally or a fixed cost that we would have to add. You know, we would view it as, you know, kind of the whipped cream and cherry on the sundae, when the transaction market does come back.
Mm-hmm. Okay. And then switching over to capital allocation, you guys mentioned you guys have made a lot of progress on your debt reduction efforts. So maybe could you talk about, you know, all the progress you've made there since the spin, and now you guys are below one times levered. You know, maybe just talk about what you guys have done
Yeah
over the past few years.
Yeah. You know, and Dan mentioned it earlier that that was, you know, one of the one of the big three hurdles, coming out of the spin, being overlevered. You know, and, and it was everything from the cost-cutting efforts to holding back on, you know, some investments into the business and really navigating our way toward cleaning up the balance sheet. Obviously, the disposition of the language solutions business was helpful along the way. And then you know, with the good cash flow, you know, we, we, we stayed committed to taking that problem off the list. So I think when you look back, you know, we implemented a share repurchase program, back in 2020. Kicked that off early 2020, then COVID hit.
We paused that temporarily and then started buying back shares later that year, and then throughout 2021, 2022, and 2023. And that's proven, you know, to be a good investment. I think, you know, we continue to look at opportunities to grow the business and always keep coming back to the fact that our organic plan has worked very, very well, and there's plenty of opportunities ahead, and that's priority number one for us. You know, from an M&A perspective, we look at opportunities, but, you know, just where valuations have been historically, and even with some of the recent pullback, you know, when you look at assets that are right down the middle for us, from a strategic perspective, those valuations don't really make sense.
I think, then when you look at it on a relative basis, that math becomes even more challenging. So I'd say M&A and dividend are at the bottom of the list in terms of capital deployment priorities.
And yeah, you mentioned you guys have been buying back, you know, a lot of stock over the past few years. You know, recently, the stock has had a nice run. How do you guys feel about buying back stock at these levels?
Yeah, so we, you know, can't comment specifically, but we, you know, we do have an authorization in place. You know, historically, we've been much more aggressive at the lower levels, but still active at the current levels. And that's, I think, I'd say, probably more the same philosophy, at least, going forward.
Mm-hmm. Okay. And then switching over, you guys, I think it was a couple of years ago now, you provided 2026 targets, which I think you hinted on your last earnings call that might have been extended a couple of years. But could you talk about these targets and, you know, bridge the gap from where you are today and how you get there?
Yeah. So the first thing I would say is we plan on giving updated guidance on our fourth quarter earnings call, which will be next month. And we'll extend that out to 2028, to your point. When you look at the guidance that we've provided, you know, it's really a couple key areas: organic growth on an overall basis, really growing the software businesses as, you know, similar to historical rates, which becomes more and more challenging, and then driving a lot of cash flow, improving margin, et cetera. I think, you know, probably if I disaggregate the pieces on the software growth-
Mm-hmm.
You know, Dan commented about some of the areas where we're seeing success in terms of market share. Also from a pricing perspective, the transition from the old ActiveDisclosure platform to the current version, we saw price uplift in the mid-teens. Now, that's not gonna continue. You know, that was a one-time transition, but we do have annual escalators in those contracts in the mid, call it mid-single digits. Same thing on the Arc side. And then, you know, probably one of the variables, you know, as clients continue to migrate more from the service offering to the software offering, there'll be some shift there going on, but that's probably the other biggest driver.
We're finding, you know, even with Tailored Shareholder Reports, that there's a balance between what can be done by software or what clients wanna use the software for, versus what they want the traditional services for. So, again, Dan pointed out, one of our strategic advantages is being ready to serve the clients in any way they wanna work, whether that's software or some of the traditional service.
Mm-hmm. Okay. Yeah, that's helpful. And then kind of on a similar note, could you talk about any variables that could either drive, you know, upside potential or downside risk to those targets?
I would say, you know, the biggest single swing factor would be the activity in the transactional market. And I would characterize that as, you know, most likely being upside, given the low levels where we're at, at this point. And probably, the other factor is what I alluded to, in terms of the customer desire, whether to, you know, adopt more software solutions or, really lean more on the services. I'd say you know, to a certain extent, the fact that it's, you know, recurring revenue and contracted revenue, we're somewhat indifferent, you know, depending on the specific case. But, you know, I think again that it's a competitive advantage for us.
Mm-hmm. Okay. And then, you guys have also teased about, you know, reporting some additional software metrics. Could you talk about, you know, how you guys are thinking about that now, and, you know, when investors could potentially see any update there?
Yeah. We're gonna. We plan to issue some of the traditional software metrics in 2024. You know, and some of the products are, it's more conducive, and the metrics are more meaningful, ActiveDisclosure certainly being one of those, you know, customer retention rates, ARR, et cetera. You know, something like Venue is a little bit different. And then, given the service component, the more heavier service component on the Arc Suite, you know, a little bit of different dynamic there. But certainly, on ActiveDisclosure, we intend to disclose some more of those metrics this year.
Mm-hmm. Okay, that's helpful. And then just, you know, kinda taking a step back, looking at the business as a whole, could you guys talk about, you know, the current operating environment, how you guys have been performing, and, you know, given all the moving pieces, you know, what your expectations are as we, you know, kick off 2024?
Yeah, and again, we haven't given guidance yet. Still refining kind of the what we believe the outlook to be. You know, certainly, you know, 2023 was a challenging year from a transactional perspective. You know, frankly, we're kinda planning for more of the same in 2024. That said, we did see some signs of life early in January in terms of the number of IPOs being filed. But, you know, this couple of weeks here certainly don't make a trend for the year, but we're definitely encouraged by you know, the overall dynamic in the market and some of the activity that we're seeing. And then again, I think from a Tailored Shareholder Reports perspective, again, we'll give guidance on what we ex-...
What we expect, the impact in 2024, and then on a full year basis in 2025 to be. So, you know, some two tailwinds there. And then, you know, when you look at the rest of the business, it's really more about more the same, strong execution, being disciplined on, price levels, cost structure, et cetera. All the things that I pointed to in terms of driving the margin is really, you know, they're gonna be the focus for 2024.
Yep. Yeah, makes sense. That's helpful. And then, you know, as we kind of wrap things up here, is there any areas you believe DFIN's being, you know, misunderstood or that investors are kind of missing in the story?
You know, I think when we look at the sum of the parts, and despite having a nice run-up in the equity price, and obviously with the very little net debt, you know, we think the sum of the parts far exceeds the whole. That said, you know, we have seen some valuation improvement, and we would expect as the company becomes more of that company of the more attractive offerings, that we would continue to see that. So I think it just comes down to individuals' beliefs around the pacing, and so that's why, you know, in fact, we've continued to put out longer term guidance so that we can continue to track against that. And, you know, we're internally, we've broken this into chapters, right?
So we think about it in chapter one, it was the spin and a few years to actually separate from the former parent and get out of all the transition service agreements and stand up our own systems and our own processes, et cetera. Chapter two, which we're probably not. We're past the middle of it, but we still have, you know, 12, 24 months left. It's a little bit different in each function, but it's really fundamental transformation. And so, you know, we have gone function by function within the company and within each of the business units and made a dramatic change throughout. You heard Dave talk about governance processes, right? Those are things that have been enhanced. Financial rigor has been enhanced across the organization.
We've brought in a lot of new talent that has been merged with existing talent. We have tremendous people. We've got people with a great amount of tenure, and then supplementing those with outside talent to professionalize some of the functions has really helped us. So I think, you know, we continue down that path, and I think it just comes down to folks' perspective. And then chapter three is, you're at the point, the platform, as we talked about, is substantially completed, and now you're just driving sustained revenue growth and profitability and cash flow growth as, as you know, we're highly focused on EBITDA margin and cash flow.
So all of our growth initiatives and, you know, what helps the governance, financial rigor, comments, what helps is to put those processes behind it to make sure that that we're placing the bets in the right spot. I mean, I view it, and I've said this publicly before, the opportunities ahead of us far exceed what we've already accomplished. And, you know, said another way, there's going to be many more opportunities than we're ever going to be able to digest. So we just have to pick the right ones. And I think these processes also help us, you know, post-audit or another term, you know, check milestones along the way, and, you know, in some places, cut our losses early, and in other places, double or triple down.
Mm-hmm. Awesome. Well, yeah-