Everyone, my name's Kyle Peterson. I'm a fintech analyst at Needham. Welcome to our TMT conference. Up next, we're have DFIN going to be doing a fireside chat here. So yeah, I guess, thank you for joining us. Maybe if you could start out, and just give us, for those that aren't as familiar with the story, a quick overview of, you know, DFIN at a high level, I think that'd be really helpful for the audience.
Great, thank you. So, I'll start. We help clients, which are corporations and mutual funds, regulated insurance companies, excuse me, comply with SEC regulations. The client base is Fortune 1000 and funds insurance companies, the vast majority of those. The client base, within the client base are finance departments, general counsels, chief compliance officers, and then the influencers, or decision influencers of decisions such as investment banks, and law firms. So that's really the client set. You know, we spun out of R.R. Donnelley back in 2016, and we've been on the path since then, to really substantially change the product mix, how we go to market.
So we've seen pretty very good growth in software, continued strong performance in our service offering, and then a large decline in print as output and communication to clients.
Great. That's really helpful. You know, maybe if you could talk about, you know, some of the competitive dynamics in your end markets. Obviously, I think there's, you know, some differences within some-
Yeah.
... different software solutions in the print business, but-
Yeah.
... how competitive are each of those?
Sure.
And who are you guys going up against when you do go to market?
Yeah, sure. So, one of the things that differentiates us is the strong service backbone and our software products, and you know, that creates solutions for clients who ultimately want us to keep them compliant and need us to keep them compliant. And so the core three products that we have are the Venue data room, we have ActiveDisclosure, which is a corporate compliance product, and then we have ArcSuite, which is a 40 Act mutual fund insurance compliance product. And the competitive dynamic across each is very different. We are number one, two, or three in each of our offerings.
As I mentioned, the differentiator for us is that ability to offer the client the technology solution, and then for some of our technology solutions, they require much more service in order to operationalize them within our client's environment. And so, you know, competitively, we compete against everyone from much larger corporations, just a piece of their business, to pure software players who are more point solutions, and then all the way down to small providers who, again, may be at one of our offerings.
That's, that's helpful, and, I think how you guys have been performing, in Venue, especially has been something that's really jumped out. You guys have posted really impressive growth there and seem to be outperforming the general M&A market. So maybe if you could give us a bit more color on, you know, what's driving, you know, that upside and appears to be, you know, share gains.
Absolutely. So just to level set, Venue's a data room product. We look at the core use for that is M&A. Different than our transactions offering, which is really a public to public, public corporation to public corporation, offering. Venue applies to any deal. It can be private to private, it can be deals that don't get done but that are explored in the marketplace, et cetera. So we have seen in most markets just more stable performance than the broader or than our broader transactions offering. The outperformance and the performance has been really strong over the past 12-18 months. Combination of two things: one, we've continued to invest behind the product, and we're actually in the process of accelerating some investment there. And the second is sales execution.
You know, a very robust sales management process and looking at, you know, getting into it, the advisory firms in a much more robust way. And so, you know, to your point, while the market can be a little bit opaque because most of the suppliers are private or our competitors are private and/or a piece of a larger company, we definitely feel like we've been taking share.
Great. You know, that's, that's helpful. You know, maybe switching over to ArcSuite, you know, the growth there has been a little choppier. Does seem like there's some regulatory impacts there, but, you know, maybe give us a little bit of more color on, you know, ArcSuite growth that, and you know, how investors should think of that business over, you know, the medium term?
Sure. Yeah, there's 4 modules within ArcSuite, but I'll talk about it in the at the ArcSuite level. Extremely well-positioned with asset managers, very well-positioned with third-party administrators, and so with such a strong installed base, we do see inflections occur at regulatory change, and so we saw one a couple years ago, when we rolled out our Total Compliance Management offering that came on the heels of SEC regulation, which was a suppression of print with 33e-3. We see additional opportunity with tailored shareholder reports, which becomes effective in July. And then what typically happens is you see the lift, and absent new regulation, you see a leveling out in a you know mid-single digits type of growth rate, until you see the next regulatory change and lift.
One of the positive things for our business is, despite the administration, we generally see more and more regulation.
That, that's helpful. You know, maybe if we kind of think about your, at a high level, your, your clients, it does seem like a lot of them are, are either corporates or, you know, investment managers and such, they're helping with whether it's compliance or, or regulation. Are there any other, like, adjacencies that you guys see, you know, being able to, you know, expand, you know, whether it's in, you know, the alternative space or, or just other areas completely? How do you guys see your client base evolving over time?
Yeah. So to that point, you know, very, very strong with corporates, very strong with funds, strong with insurance. There are... When we talk about corporates, right? It's the broad swath of any vertical. And so there are some vertical opportunities and solutions that we've explored. To your point on private funds, there's opportunity, there's some regulation which would take us outside of the SEC mandate, the Financial Data Transparency Act, which would call for other agencies within the government to tag data. And, you know, the core of many of our offerings are document management, data tagging, XBRL, to be more precise, and then filing. And so there's opportunity to expand the base there, in addition to state and local government needs.
That's, that's helpful. And, you know, maybe we could switch over to Tailored Shareholder Reports. I know you guys, sort of alluded to that, briefly earlier here. I know that's been something that, you know, has been on people's radars for a while. You guys did go out and quantify, you know, the expected impact-
Mm-hmm.
... from that. But if you could remind us kind of what you guys, you know, disclosed and the timing of, you know, the benefit that you expect to see there?
Sure. Yeah. The regulation goes into effect midyear this year in July, so expect about a half year of impact in 2024, full year in 2025. We articulated or sized it a couple of quarters ago at $20 million-$25 million, half of which is software and services, and the other half is print. We also said at the time and reiterated that we've seen more pricing pressure and competitive dynamic on the print side. So feel really good about the software side. You know, on the print side, we've kept a high level of price discipline, so we may see that number come down a bit.
Okay. That's really helpful. And, you know, what are there any, whether it's, you know, risks or the timing, kind of what could, I guess, cause some of the financial impacts of whether it's being overshoot to the upside, or is there any, you know, downside risk or risk of delay, or anything along those lines?
Sure. Yeah, I mean, until it's official, it's not official and in place, although we're very close to the finish line. We've been onboarding clients. I think there remains some of the market still in play. So that you know could be a good thing. We feel good on the software side with SOWs and onboarding that's going on today. You know, our solution, you know, to take a step back, Tailored Shareholder Reports are a financial report. Our ArcReporting system is the number one financial reporting system for funds, and so it's a pretty seamless process to come right off of the ArcReporting into a tailored shareholder report, and then there's some back end things that need to occur in terms of linking it back to the N-CSR.
So we think there's a little bit of the market to play out. We feel very good on the software number.
Got it. Yeah, that's helpful. And, you know, kind of always, obviously, tailored shareholder reports were a thing that seems like it's been kind of long in the making. Are there any other, whether it's bigger or regulatory changes or the benefits or impacts that you guys are eyeing or monitoring as the kind of what could be the next?
Sure.
... big thing for you guys?
Yeah. The Financial Data Transparency Act, as I mentioned, is one that's out there. You know, how that gets implemented, if it's agency by agency, et cetera, is still up in the air a bit. ESG was passed, but it's in, now litigation. There was some regulation passed in, reporting required in California. So, you know, there's always a bunch of things on the docket, some more consequential for our business, some that would just be additional disclosure within existing reports.
But yeah, I think when we take the step back and look at the landscape, we feel really good about the compliance platform that we're building, the need that companies and funds are gonna have for the services and solutions that we're providing, and then internally, our own analytical and financial rigor around determining which of those we should serve. Because we do often find ourselves with-
... there's going to be more out there that we could do than things out there that we can do well. And so, you know, we factor in opportunity cost as well, but feel really good about our ability to now pivot, and drive growth.
That makes sense. And, you know, maybe, you know, if we could switch over to capital markets. You guys have a fair amount of exposure there, and I think maybe the results—the impact on the results have seemed a little more pronounced as we kind of went from a very robust deal environment to not a lot going on. It seems like things are, you know, stabilizing or improving a bit. But, you know, maybe you guys could talk a little bit about, you know, what you guys have seen, at least over the last quarter or two, how some of the client conversations are going on the capital market side. That would be helpful.
Yeah, sure. So in 2023, our capital markets transactional revenue was under $200 million, and that's coming off of a really significant year in 2021, and then where we did over $400 million in total transactional revenue, so less than half of the 2021 peak. And to your point, Kyle, you know, I think we still see pretty significant impacts of the swings in revenue and how it impacts our profitability. I think probably the one thing that we've changed historically is the overall cost structure. Not only taking out a big portion of our fixed cost related to that business, but then also you know, using outside providers, making that cost much more variable.
So that while we still see swings, in you know, the peak market to the trough market, the overall level of profitability in all markets is higher than it was historically. You know, you look back at 2017, 2018, 2019, where capital markets transactions were, you know, kind of in the historical range, $270-$280 million in revenue. And our consolidated margin, EBITDA margin, was in, you know, mid-teens, call it 15%-16%. And currently, even with lower overall revenue from a company perspective, and certainly much lower capital markets transactional revenue, EBITDA margins are up 1000 basis points into, you know, 25%-26%.
And that's really a function of the cost reductions we've made, some of the pricing impact, and then I would say, you know, kinda in line with our strategic priorities, the shifting of the mix and growing the software revenue, you know, shrinking the print revenue, and just, you know, the blended margins are much, much better.
Great. You know, that, that's really helpful. And, and I guess maybe as kind of a follow-up to that, it does sound like you guys have, you know, taken a lot of costs out on the capital market side. Does seem like at least some of those are, are variable, but, you know, how, how should investors think about what the cost base looks like, if and when we do get a recovery in capital markets and, and kind of what's the incremental margins on, you know, some of that upfront?
Yeah. So, the good news is, and we've seen it play out, as coming out of 2019 into 2020 and 2021, where you know, in, in 2019 and then certainly at the beginning of the pandemic, we got even more aggressive on the cost side. And then you roll into 2021, where we did, you know, $400 million plus of transactional revenue and didn't have to add a lot of costs. We, you know, generally think of the incremental margins in that space in the 50%-60% range. And on a go-forward basis, that would still remain the same.
You know, to my earlier comments, we'll still see the outsized impact of swings in the capital markets environment, but it's not, you know, the overall level of base profitability is at a much higher level than it was historically. And then, from a cost structure perspective, given what we've done to make that cost structure much more variable, you know, we see it come up and then come down equally, in a trough period.
That makes sense. And maybe as a follow-up on, you know, costs in the business in general, you guys have done a really good job managing expenses as you know been in the choppier macro. Obviously, capital markets has been down. What are some of the other actions you guys have taken with regards to, you know, the cost structure? And, you know, how, you know, should we think about how this makes your business look over the next few years?
Yeah, so I would say we've done a few things. Most of the cost reduction really centers around headcount reduction. But that's driven by, you know, different factors. So one factor would be on the print and distribution side, we've gone from five locations down to a single digital print location. So all the headcount and fixed costs that comes along with that manufacturing footprint has come out. And then even within the support functions, whether it be, you know, IT, product development, certainly the service organization, we've made some investments there to improve underlying processes and visibility to data, and therefore those efficiencies have allowed us to reduce headcount, yet maintain or increase the overall level of, you know, customer satisfaction, efficiency within each of the sub-functions that I mentioned.
Mm-hmm. That makes sense, and, you know, maybe if we could talk a little bit, you know, about business mix. You know, you guys have been an evolving story of call it more software, less print to put it, like, very simply. You know, how should we think about that business as it continues to evolve? You know, print's been in decline for a while. Is there a size or a point where print kinda hits like a stabilization point? Or do you expect that to continue to run off and transition to software?
Yeah, so we think it'll become proportionately smaller and smaller over time. In our five-year projections, you know, we estimate that by 2028, that print will be right around 15% of our total revenue. And at that point, you know, tough to see much further out than that. We would expect ongoing secular decline in the, call it, low- to mid-single-digit range. And, you know, barring any kind of regulatory changes that would either accelerate the print decline or, you know, in the case of Tailored Shareholder Reports, right, it actually kinda turned that around from what we've seen historically. But I'd say right around that 15% level and probably modest declines going beyond that would be a reasonable estimate.
That, that makes sense. You know, maybe if we could, you know, dive a little bit more into, you know, the growth rate. You know, you guys have disclosed that... I know there's a lot, some moving pieces there with, you know, print, declining, software growing, but, you know, maybe within software, if you could talk a little bit more, about, you know, some of the different kind of building blocks for growth, whether it be, you know, new logos, upsell, cross-sell, pricing. Just what are the different drivers that, that you guys see there?
Yeah, I would say, you know, at the highest level, it's all of the above. I think the investments that we're making, you know, specifically in the compliance products, ActiveDisclosure and ArcSuite, not only to address some of the new regulations, but also, you know, just improving the overall set of capabilities that we're bringing to market, taking client feedback, and really gaining share of wallet, being able to increase prices, you know, to get a return on that investment for the new capabilities. And then, you know, as we talked about earlier, you know, have had some success in gaining market share, and I think when you look at, you know, the compliance side, you know, we expect to grow in the teens.
You know, with Venue, we've said, you know, high single digit. We've actually been outperforming that more recently, but I think over the long run, that's probably a good way to think about the, you know, the overall portfolio and how each of those products grow.
Mm-hmm. Okay. And, you know, maybe switching over to the balance sheet. You guys have made a ton of progress on that front. You know, since the spin, you guys had post-spin, you guys had a decent amount of leverage, paid down a lot of debt. You guys have been, you know, buying back stock. Business generates a good amount of cash. How are you guys kinda thinking about, you know, capital allocation, and kinda how you guys are kinda balancing, whether it's, you know, buybacks, debt paydown, or M&A?
Yeah, it'll- I, I'd say, at the highest level, you should expect to see more of the same of what we've done historically, and probably, even closer, more closely aligned to what we've done recently, and that's, you know, a combination of debt reduction and share repurchases. I think when you go back to... You know, you alluded to the spin, we were levered at 3.5x. You know, our net leverage now is under 1x, and so we feel good about the progress we've made on the balance sheet. I think, you know, from an M&A perspective, you know, we'll continue to look at opportunities.
But I'd say based on what we've seen historically in the market, and the valuations, certainly for assets that are a good strategic fit for us, you know, tend to be very, very highly valued, and in most cases, we would say overvalued. And so you weigh that against, what we've been able to accomplish organically, and that's really across Venue, Active Disclosure, Arc. You know, just the organic returns are much, much better. So the CapEx investment there, as well as, you know, an ongoing share repurchase program, make the most sense for us, with, you know, M&A and a dividend being a distant, fourth and fifth on the list.
Mm-hmm. That's, that's helpful. And then, you know, kind of thinking a little bit about organic investments in the business, you know, obviously, you guys have made a lot of progress on cost, but there seem to be a lot of growth opportunities in software. So how are you guys kinda thinking about, you know, whether it's, you know, product development, ramping sales force? What are kinda some of the key areas that you guys see as organic investment opportunities or priorities?
Yeah, so I'll start, and then Dan can comment. I just wanted to say, like from a cost reduction perspective, that the cost we've taken out of the business is net of the cost that we've added into the business. And you know, we've hired a lot of product development people, engineers, you know, even on the IT side, the underlying technology that supports that. So really taking out more costs, redirecting some of those dollars, investing in areas that support the strategy, and then obviously the balance gets reflected in the P&L.
Yeah, and I'll add to that or, and build off of it. You know, if you look at our spend in the technology side, which has obviously been increasing year-over-year, over time, that spend starts to shift in terms of the amount that's spent for growth initiatives versus the amount that's spent to make up for technical debt and, you know, rebuild legacy systems, upgrade, et cetera. So we're beyond that now, which is great. And so when we look at the opportunity, both for organic investment, to your point, in technology development, certainly, but then also on the people side. And so we've brought in a lot of good talent within the sales organization. We've brought in talent, you know, across the company in every single function.
But you know, that, that's the path forward. It's sort of all of it. And, you know, like I commented earlier, I think the next evolution and, you know, developing the skill sets around modeling things out, making sure we factor in opportunity costs, making sure that, you know, the size of the prize is big enough to spend our time on. Because the one thing we can't get more of is time, and so we've really, you know, pushed simplification on things, standard processes, but then on the go-to-market-size side, finding opportunities of size and scale that really matter for our clients and, and then ultimately for employees and shareholders.
That makes sense. So, you know, maybe switching over from a share price perspective, you guys have been obviously performing well recently. Does seem like there's still a bit of a valuation gap between, you know, yourselves and peers. But, you know, any thoughts on whether it's kind of who your peers are and kind of how you guys are feeling about, you know, repurchasing stock versus, you know, paying down floating rate debt or something, just given some of the recent movements in interest rates and share price?
Yeah, you know, it's interesting, right? Our story's always been about mix shift, and so, you know, as we've run analysis of some of the parts versus the whole, there's always a big disconnect, right? And as we become more of the company with of the assets that have the higher valuation, that theoretically should shrink. And we've in fact seen some of that shrinking, yet we still believe that there's a gap that exists. And I think it's just a question of one's view of how long it takes to close that gap, and we do that analysis all the time to determine, you know, the share repurchases relative to capital allocation.
You know, the highest and best use, and the thing that we need to make sure of, is that we maintain the flexibility to execute the strategy, because that will deliver the highest return. We have more than ample financial flexibility to do that, so then we go into either paying down debt, and/or share repurchases.
Yeah, and you know, with respect to balancing debt repayment and share repurchases, you know, I think a lot of factors weigh into it, right? But generally, we've been much more aggressive at lower prices. But even in the first quarter, right, when the stock was in the low-to-mid 60s, you know, we spent $8 million repurchasing shares. So I think being methodical about the repurchase program, just being disciplined, it is helpful and like I said, more aggressive at lower prices. You know, certainly the interest rate environment is one variable that factors into it, but it...
You know, we have such a small quantum of debt that, you know, the decision's not really based on the current interest rate, and it's there, there's. We believe that there's much more upside in the stock, and it's not that thin of a margin in terms of really impacting the outcome of that decision.
That makes sense. So, maybe if we could, you know, touch briefly on, you know, AI. Kind of seems like that's the topic of the day, you know, across the market in general. I think everyone is curious whether, you know, AI is gonna help or hurt pretty much any business in the market. But, you know, maybe if you could talk a little bit more about your thoughts on either how AI fits into your long-term strategy or, and, and if you're using it today, and if so, how?
Yeah, sure. So, you know, certainly applications for internal efficiencies, applications for customer-facing products, you know, we do really prioritize security, governance, accuracy, given the nature of our work, and given the information that we handle for clients. So that's, you know, the number one priority. When we look at, you know, whether or not we've been using machine learning and different applications within our products, going back to, I think, as early as 2018. So we have some of that technology already embedded in existing products. And then, you know, we're continuing to now explore, in addition to the internal efficiency plays, of which there are, we're looking at, you know, document creation opportunities via digital assistants.
And we're looking at, you know, document creation, compares, reconciliations, et cetera, utilizing, you know, not just AI, but also more extensive ML. So we think there's application, but we're also very mindful of our responsibility around security and governance.
That makes sense. And, you know, maybe if we could just kinda switch back to, you know, the high level. Wait, are there any areas about whether it's, you know, your business or the shares that, you know, you think is really or misunderstood, or that you wanna clarify for the audience?
Yeah, I would just say, you know, we put out a lot of information, trending schedules. We put out five-year guidance, and it's all intended to articulate the direction that we're headed, and to be a way for you to measure our performance. I tend to think the story at this point is pretty well understood, you know, thanks to you, Kyle, and some others. But you know, I think it's then a question of the belief in the timing of the execution. I think we've proven we can execute, and now it's, you know, one's view of how long it's gonna take for us to continue to move down the path.
That's really helpful. We've covered quite a bit, you know, during this, but, you know, open it up to the audience if there's any questions. You know, feel free to chime in.
Have you guys historically experienced strength at times when a lot of companies are going public, just in terms of conduct or, like, what's that pipeline look like in terms of private companies going public and for your solution?
Yeah. So part of our business, right, helping clients go public, we have historically performed really well in strong IPO markets. Just, you know, in terms of share of the IPOs, the higher quality IPOs, if you will, and then there is a high attach rate when one goes public into our compliance solutions. So, you know, that's the follow on. I don't know if you have anything to... Yeah.
All right. I guess we'll leave it there. We've covered a lot, but thanks, guys, for joining us, and hope you enjoy the rest of the conference.
Great. Thank you for-