Donnelley Financial Solutions - Earnings Call - Q2 2021

Transcript

Speaker 0

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Zhao, Head of Investor Relations.

Thank you. Please go ahead, sir.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining Donnelly Financial Solutions second quarter twenty twenty one results conference call. This morning, we released our earnings report, a copy of which can be found in the Investors section of our website at dfinsolutions.com. During this call, we'll refer to forward looking statements that are subject to risks and uncertainties. For a complete discussion, please refer to the cautionary statements included in our earnings release and further details in our most recent annual report on Form 10 ks, quarterly report on Form 10 Q and other filings with the SEC.

Further, we will discuss non GAAP financial information. We believe the presentation of non GAAP financial information provides you with useful supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the earnings release and related tables for GAAP financial information and reconciliations of GAAP to non GAAP financial information. This morning, I'm joined by Dan Lieb, Dave Gardella, Craig Clay, Eric Johnson, Floyd Strimling and Kamri Turner.

I will now turn the call over to Dan.

Speaker 2

Thank you, Mike, and welcome to your first earnings call at DFIN. Mike recently joined DFIN from Teradata, an enterprise SaaS company, where he led finance for one of their go to market segments. At DFIN, Mike is heading up financial planning and analysis as well as investor relations, working closely with Dave. We look forward to you meeting Mike. Good morning, everyone.

And from all of us at DFIN, we hope that you and your families are staying safe and healthy. After a very strong start to the year in the first quarter, I am again pleased with the momentum in our second quarter operating performance as well as within our end markets. On our last few quarterly calls, we noted that we had been seeing a return to a more normalized level of growth in software sales and a significant increase in transactional activity. The momentum in software sales accelerated in the second quarter, while the transactional environment within capital markets remained strong. Our second quarter results offer another proof point of the success of DFIN's transformation and our 44 in '24 strategy, specifically targeting 44% of our sales from Software Solutions by the year 2024 and more importantly, the resulting financial profile from such a business mix.

For eight consecutive quarters, we have expanded year over year adjusted EBITDA margins as our business mix changes. This has involved investing heavily in some areas for profitable growth, aggressively managing expenses in other parts of our offerings and eliminating some offerings altogether. Over this two year period on a trailing twelve month basis, our overall revenue increase of 3% or $27,000,000 reflects our changing mix. Our revenue change is comprised of growth in software sales of $50,000,000 percent, tech enabled services growth of $87,000,000 or 23% and a decline in print and distribution of $110,000,000 or 32%. These are large changes over a two year period, yet they are positive changes for our business.

Our software offering now totals $232,000,000 with roughly two thirds of that being recurring high retention rate offer. The balance of our software offering is largely driven by the corporate transactions market. By year end, we expect our software sales to exceed our print sales for the first time in the company's history, representing approximately 30% of our total revenue. And when we talk about our forty four and twenty four strategy, we note in addition to the mix shift, what's more important is the resulting financial profile from such a business mix. Two of the resulting financial aspects are an increase in profitability and an increase in margin.

Over the same two year period, adjusted EBITDA has been up by over $100,000,000 driving margin up 1,000 basis points to 25%. At quarter end, our trailing four quarter adjusted EBITDA is $233,500,000 In short, our strategy is delivering strong results. We look forward to sharing ongoing progress with you as we execute our strategy. As it relates specifically to the second quarter results, total sales grew 5.3% from last year's second quarter. Excluding Print and Distribution, year over year net sales increased 23% in the quarter as Software Solutions sales grew 40% and Tech enabled services grew 16% overcoming a decline of 26% in print and distribution related sales.

As a reminder, the decline in print and distribution sales is a result of the regulatory change in the investment companies business and our proactive exiting from low margin printing contracts, consistent with our strategic priority of investing to grow the more attractive recurring software and tech enabled services aspects of our business. The record high quarterly software solution sales was led by our recurring compliance products, which in aggregate grew 36% over the second quarter of last year. We've received positive market feedback and strong client adoption for our recent product launches, particularly in active disclosure and total compliance management, a component of our ArcDigital offering, along with ArcPro contributing to the 36% growth in our recurring compliance software sales. In addition, our virtual data room product Venue achieved another all time high for quarterly sales and grew approximately 50% year over year largely driven by an increase in M and A deal activity and once again what we believe to be market share gains. Similar to the last few quarters, the strength of the Capital Markets transactional activity and our strong market share resulted in robust sales growth with transactional sales increasing more than 38% from the 2020.

The growth in higher margin Software Solutions and Tech enabled Services net sales, our proactive pruning of low margin print work along with the significant impact of our ongoing cost control efforts, including execution of our aggressive plan to rightsize our print platform in light of the regulatory impact on print demand, again resulted in strong quarterly earnings. Second quarter non GAAP adjusted EBITDA was $79,900,000 an increase of over 31% from last year's second quarter. And adjusted EBITDA margin was 29.9%, up 600 basis points from second quarter twenty twenty adjusted EBITDA margin. Given the trend I noted earlier with eight consecutive quarters of expanding year over year EBITDA margin, our trailing four quarter adjusted EBITDA margin is currently 25%, tracking well ahead of our long term target of at least 20%. As I highlighted on our last call, the steps we took during 2020 and continue to take in 2021 to optimize our operations, streamline our organizational structure and real estate footprint contributed to our second quarter growth in adjusted EBITDA and expansion of adjusted EBITDA margin.

At the same time as having aggressively managed the cost structure in certain areas, we've also increased investment levels in support of our strategic priorities. Specifically, we've allocated more resources in terms of both people and dollars toward our software products and the technology that supports these products. To be clear, while we've increased investment in this area to accelerate our transformation, we've done so with the same disciplined approach we've taken historically, targeting areas and projects where we expect to deliver superior economic returns. Free cash flow in the quarter improved by $16,500,000 despite funding $15,700,000 related to the LSC Multi Employer Pension Plan obligation. Dave will cover this topic in more detail.

At quarter end, our non GAAP net debt was lower than last year's second quarter by $112,300,000 resulting in a non GAAP net leverage of 0.9 times, 1.2 times lower than the 2020. Before I share a few business highlights, I would like to turn the call over to Dave to provide more detail on our second quarter financial results and our outlook for the third quarter. Dave?

Speaker 3

Thank you, Dan, and good morning, everyone. As Dan noted, we delivered very strong results in the quarter, including 5.3% sales growth and significant year over year increases in non GAAP adjusted EBITDA, adjusted EBITDA margin, non GAAP adjusted earnings per share and free cash flow. We maintained strong market share in our transactional filing business and posted 40 growth in our software solution sales, all while continuing to drive operating efficiencies. On a consolidated basis, net sales for the quarter were $267,500,000 an increase of $13,500,000 or 5.3% from the 2020. Software Solutions net sales in the second quarter increased by $19,000,000 or 39.9% primarily due to an acceleration of virtual data room activity in Venue driven by the improved M and

Speaker 4

A environment, accelerated product adoption within ArcSuite as well as solid subscription growth in ActiveDisclosure.

Speaker 3

Tech enabled services net sales increased by $18,600,000 or 16.1%, primarily due to increased capital markets transactional activity. Print and distribution revenue decreased by $24,100,000 or 26.5% primarily due to the regulatory driven reduction in demand for printed materials within investment companies and less commercial printing where we have proactively exited certain low margin contracts. This decline was partially offset by higher print related sales as a result of the increased transactional activity within capital markets. Regarding our print platform, we have made substantial changes over the past couple of years. By year end 2021, we expect to be utilizing our third party network for approximately 85% to 95% of our print needs, variabilizing the cost structure for the majority of our print production and at the same time operating our own digital only print platform to meet the demand for higher value quick turn requirements.

Second quarter non GAAP gross margin was 56%, approximately nine seventy basis points higher than the 2020, primarily driven by a favorable business mix featuring growth in higher margin tech enabled services and software solution sales combined with lower overall print volume and the impact of ongoing cost control initiatives. Non GAAP SG and A expense in the quarter was $70,000,000 or $13,200,000 higher than the 2020. As a percentage of net sales, non GAAP SG and A was 26.2%, an increase of approximately three eighty basis points from the 2020. The increase in non GAAP SG and A is primarily due to sales commissions on higher sales, changes in the business mix and higher incentive compensation expense, partially offset by the impact of ongoing cost control initiatives. Our second quarter non GAAP adjusted EBITDA was $79,900,000 an increase of $19,100,000 or 31.4 percent from the 2020.

Our second quarter non GAAP adjusted EBITDA margin was 29.9%, an increase of approximately 600 basis points from the 2020, again primarily driven by the favorable sales mix and ongoing cost control initiatives, partially offset by higher incentive compensation and selling expenses. Turning now to our second quarter segment results. Net sales in our Capital Markets Software Solutions segment were $43,800,000 an increase of 37.7% from the 2020, primarily due to increased Venue Virtual Data Room activity and continued growth in ActiveDisclosure subscriptions. Venue sales increased approximately 50% from the 2020 driven by an improving M and A environment and sales and marketing efforts focused on gaining market share and accelerating growth, while our recurring compliance products after disclosure in file 16 also had a solid quarter posting 26% growth in aggregate. Non GAAP adjusted EBITDA margin for the segment was 29%, an increase of approximately twelve sixty basis points from the 2020.

The increase in non GAAP adjusted EBITDA margin was primarily due to the increased sales, a favorable sales mix as well as the impact of operating efficiencies partially offset by higher selling expenses as a result of the increased sales volume. Net sales in our Capital Markets Compliance and Communications Management segment were $153,100,000 an increase of 26.7% from the 2020, primarily due to increased capital market transactional activity continuing the trend that began in the 2020. This growth was largely driven by the ongoing momentum in IPO activity as well as increased M and A activity including de SPAC transactions. Non GAAP adjusted EBITDA margin for the segment was 43.4%, an increase of approximately two sixty basis points from the 2020. The increase in non GAAP adjusted EBITDA margin was primarily due to the increased sales volume and a favorable sales mix.

As we anticipated and also communicated on our last call, we did see a sequential decline in SPAC IPO registration activity based on the SEC statement regarding the accounting classification of warrants and their potential action on legal protection for growth projections. Second quarter sales driven by SPAC registrations were less than $400,000 compared to approximately $3,600,000 in the first quarter. Over the last four quarters, we've completed 130 registrations and have generated approximately $6,200,000 in sales for these transactions. As it relates to this activity, the bigger opportunity lies ahead as the value of a de SPAC transaction is on average 10 times the value of the initial registration transaction. Further, these transactions provide a pipeline for recurring software subscriptions to support our clients' ongoing compliance requirements.

Net sales in our Investment Company Software Solutions segment were $22,800,000 an increase of 44.3% from the 2020, primarily due to strong demand for our ARP Digital total compliance management offering in the quarter, which continues to gain momentum since we launched it in the 2020, with new opportunity rising out of the regulatory changes affecting investment companies. In addition, growth in ARPRO related to new subscription activity and organic growth from existing clients also fueled the growth in this segment. Non GAAP adjusted EBITDA margin for the segment was 29.4%, an increase of approximately 600 basis points from the 2020. The increase in non GAAP adjusted EBITDA margin was primarily due to the increase in sales and a favorable sales mix, partially offset by higher compensation expense. Net sales in our investment companies Compliance and Communications Management segment were $47,800,000 a decrease favorable of $37,800,000 or 44.2% from the 2020 due to the impact of regulatory change in investment companies affecting print related sales and the reduction of commercial printing sales related to contracts we have proactively exited.

Non GAAP adjusted EBITDA margin for the segment was 10.9%, approximately two ninety basis points lower than the 2020. The decline in non GAAP adjusted EBITDA margin was primarily due to the lower activity levels for Print and Distribution. This impact was partially offset by a reduction in overall expense within the segment, primarily due to cost savings as a result of the consolidation of the Print platform and a lower allocation of overhead costs, which are now being absorbed by our other three operating

Speaker 0

segments as the lower activity level in this segment results in a reduced need

Speaker 3

now for such shared resources. Second quarter has historically been our peak quarter in terms of print activity and with approximately 60% of the reduction in print demand now behind us, the execution of our plans to consolidate the print platform and to capture the related cost savings continue to track ahead of plan. Regarding the regulatory change that will continue to reduce demand for Print in this segment, we continue to expect a reduction in Print related net sales of approximately $130,000,000 to $140,000,000 and a reduction in non GAAP adjusted EBITDA of approximately $5,000,000 to $10,000,000 related to the regulatory change. Non GAAP unallocated corporate expenses were $11,200,000 an increase of $2,000,000 from the second quarter of last year. The increase in unallocated corporate costs was primarily due to increased incentive compensation driven by the strong performance, partially offset by the impact of ongoing cost control initiatives.

Free cash flow in the quarter was $20,900,000 representing an improvement of $16,500,000 from the second quarter of last year. As Dan mentioned earlier, this improvement was despite having funded $15,700,000 related to the LSC Multi Employer Pension Plan obligation, the vast majority of which was related to lump sum settlement payments with two of the three plants. Last year's second quarter did not include any payments related to this item as we began making payments in the 2020, so the full $15,700,000 cash outflow was incremental to last year's second quarter. As a reminder, DFIN and R. R.

Donnelly agreed to share required payments equally and an adjustment and repayment will be made as needed in accordance with the final allocation determined in arbitration, which we expect to occur before the end of the year. We ended the second quarter with $240,900,000 of total debt and $2.00 $1,000,000 of non GAAP net debt, including $10,000,000 drawn on our revolver. From a liquidity perspective, we had access to the remaining $287,700,000 of our revolver as well as $39,900,000 of cash on hand. As of 06/30/2021, our non GAAP net leverage ratio was 0.9x, down 1.2x from the second quarter last year. Our cash flow is historically seasonal.

We are a user of cash in the first half and generate more than 100% of our free cash flow in the second half of the year. As our sales mix continues to evolve to proportionately more subscription based software solutions, we expect the seasonality to be less significant. During the quarter, we amended and extended our credit agreement to among other things provide for $200,000,000 delayed draw term loan A facility and to extend the maturity of the $300,000,000 revolving facility to 05/27/2026. The proceeds of the term loan may only be used to redeem or repurchase the company's eight and a quarter percent senior notes due 2024, which become redeemable on or after 10/15/2021. It is our intent to redeem these notes at that time, which following that transaction will lower our annual interest expense by approximately $14,000,000 The company repurchased approximately 251,000 shares of common stock during the quarter for $7,100,000 at an average price of $28.19 per share.

We have approximately $39,600,000 remaining on our $50,000,000 stock repurchase authorization. As it relates to the third quarter, transactional activity in Capital Markets remained robust throughout July. Regarding our outlook for the quarter, we are expecting consolidated net sales to be in the range of $200,000,000 to $210,000,000 down approximately $5,000,000 or 2.5% year over year at the midpoint due to the planned reduction in print and distribution for the regulatory changes related to SEC rules 30e-three and 498a. Excluding Print and Distribution, third quarter revenue is estimated to grow by approximately 14% at the midpoint of our range. We remain bullish on the near term outlook for our Software Solutions sales as well as on capital markets transactional activity.

From a profitability perspective in the third quarter, we expect a non GAAP adjusted EBITDA margin in the low to mid-twenty percent range similar to last year's third quarter margin. With that, I'll now pass it back to Dan. Dan?

Speaker 2

Thanks, Dave. The execution of our strategy continues to deliver positive results. Our new software offerings continue to attract strong interest adoption. The momentum in software combined with our strong position in the transactional market has enabled us to generate sustained sales growth over the last four quarters. In addition, we have now delivered year over year expansion in EBITDA margins for consecutive quarters, demonstrating the continued improvement in our business mix and disciplined cost management, while also increasing investments to accelerate our strategy.

The trends in our top and bottom line results reinforce the value of our '44 and 24 strategy. Strategy. Achieving this goal is driven by increases in our software solutions and tech enabled services sales and decreases in print sales, yielding strong margins and cash generation. In closing, we're excited about our very strong first half of the year and remain keenly focused on driving our '44 '24 strategy. The adoption trends for our new software products and our various operational successes illustrate the exceptional value we are delivering to our clients.

We continue to find and focus on opportunities to further enhance shareholder returns. Before we open it up for Q and A, I'd like to thank the DFIN employees around the world who've been working tirelessly to develop new products, maintain our operations and ensure our clients continue to receive the highest quality service without disruption. Stay safe and healthy. Now with that, operator, we're ready for questions.

Speaker 0

And your first question comes from Charlie Strauzer with CJS.

Speaker 5

Good morning. Just a couple of quick questions for you. First of all, the impressive software growth that you saw in

Speaker 6

the quarter, maybe dive in a little

Speaker 5

bit more detail behind the drivers of that growth, especially excluding Venue. What are you seeing in terms of the drivers beyond that? And are you seeing a pickup in kind of de stack activity leading to new business as well?

Speaker 2

Okay. Thanks, Charlie. I'll start off, and then I'll ask Craig and Eric to speak a bit about the go to market on some of the new products that our engineering and product teams have recently developed and that we have in market. So if you look at our $232,000,000 of software revenue over the past four quarters. We break it into our regulatory compliance offering, which is the majority of our software.

It's purpose built for our clients to comply with SEC regulatory and filing requirements. And then to your other point, the balance is primarily our venue data room. And so we're always looking for ways to serve clients to increase the recurring nature across all of our products. We have increased our spending on technology, both existing and new products, including introducing three new offerings to the market over the past year or so. And we're seeing great client interest and receptivity across the product suite, but in particular to the new products.

The most recent introduction is new AD, which is a brand new build. We began to sell it in the market a few months ago. And then within our GIC business, we introduced a new product, Total Compliance Management, to support our clients, you know, in response with all the regulatory change going on with thirty three point four nine eight and and then even more broadly. We also introduced a new offering in Europe a year or so ago. So let me pass it off to Craig, who will then also ask Eric to make a couple of comments.

Craig, anything to add on new AD?

Speaker 6

Sure. And I think also to to touch on the SPAC piece, maybe I'll I'll start there, which is SPACs have normalized. So post the sort of SEC scrutiny, you know, what we've seen is, you know, really in q two, that total SPAC count surpasses twenty nineteen's total. So it certainly isn't at q one level, but we think it's normalized. And it's a great opportunity that's back to creating increased public companies, and it really perfectly highlights DFIN's value proposition.

We're supporting the deal team, through the traditional and new AD for the filings and the pricing. Our clients are using Venue or virtual data room for their pipe financing. And then as well, you've got this pipeline. So 400 SPACs plus looking for a target, and we're ready to support them. So then you get to it's creating these great new public companies, and the recurring high retention software of UAV.

You know, we took the experience of decades of servicing, SEC clients. In q one, we launched new AV. So built from the ground up, it's purpose driven, SEC compliant software, browser based. It integrates with our clients ERP and Excel where our clients last mile of financials reside. Simple fact onboarding and early client takeaways from those who've onboarded indicate the market wants what we have built.

We're very, very pleased with the pipeline. Our clients are converting from 83 o, to new AD or newly public clients through IPO or SPAC on NewAd, and certainly our competitive wins. Our competitor clients are welcoming having a choice at these end. So we're really excited about what we see with new AD and we're looking forward to the 2021 and beyond. Eric, I'll turn it to you.

Speaker 7

Yes. Thanks, Craig. Charlie, thanks for the question. For GIC, it's a few things. We've seen strong performance from our new ARC digital product in total compliance management solution launched in 2020 as well as new regulatory compliance drivers in The US market like IXBRL, rules 30e-three and 498a.

Our ArcSuite software helps clients operationalize reg requirements. Another important factor is the velocity of technology adoption in the investment company segment as many firms are focused on digitizing their internal processes and workflows supporting the middle and back office. And ARC Suite is well positioned to help them achieve their digitization goals.

Speaker 5

Great. Thank you very much for that. And then just kind of staying on that topic for just a second, if we could. Much of

Speaker 3

that Charlie, sorry. I was just going to add your question on the SPAC market. Craig outlined kind of the opportunity going forward. I commented on the math and what we've seen historically, you know, the 139 SPACs that we've done for under registration, 6,200,000.0 in revenue over the last year. And then my comment around the, the DSAC transaction being typically 10 times larger.

If if you run through that math, there's, you know, roughly 425 SPACs that have completed the registration but have yet to complete an acquisition. So you look at the aggregate revenue opportunity in the market, it's probably, call it, $200,000,000 over the next couple years. You know? And then even if you haircut that for completion rates and our market share, historical market share of the M and A activity, you know, to think about that as sixty to seventy million dollars of of transactional activity over the next couple years isn't unreasonable, you know, specific to SPAC or DSBAC transactions. And then as Craig also noted, you know, more importantly, it's creating a nice pipeline for us, on the recurring, software subscriptions for for active disclosure.

Speaker 5

Great. And then just, you know, staying on that for just one more second. Just if you think about the, you know, the the the companies that have begun to de SPAC. What do you feel like your share has been in terms of garnering new business from those de SPACing companies?

Speaker 6

Yes. I'll take a first shot at that. Thank you. Our share has been increasing. So certainly from the evolving SPAC, I mean, it used to be sort of the blank check last resort.

Now it's, you know, a high quality, high management team doing great things. Our share has started to reflect that. So we certainly have, a extremely high retention of the deep back from the stack of our own work. And then what we're also seeing is that the deep backs are super, super complicated, and we can then, in those deep back, actually take share from our competitor. They often upgrade their deal team, and they often then upgrade to defend.

But the real takeaway is this creation of new public companies, the SPAC holding company, the SPAC and despacking. It's creating an amazing pipeline for us to retain those companies on new AD, and create this recurring revenue. Super excited about not just the revenue, but the ongoing reporting needs of these clients and that they will be here at the same.

Speaker 3

And Charlie, just to add to Craig's comments on, you know, those the the SPAC registration where that company has also done an acquisition and it was, or that the where the initial SPAC was handled by a competitor. We've we've taken back roughly 20% or so on the DSAC transaction. And then as Craig pointed out, very high conversion rate where we don't where where we did the initial,

Speaker 6

spec transaction. Do you feel like the further contact that that that the stock is I think we've referenced on prior calls, really a a small document. So

Speaker 4

it it is

Speaker 6

the leaseback that that the real disclosure opportunity and then obviously the real reporting opportunity. Charlie back to you.

Speaker 5

Great. Just just, you know, on the share side, you know, you know, on the traditional side of business, you you feel like you're still taking share from competitors as well? Yes.

Speaker 6

We're in a strong position across an array of of product lines. Yes. Excellent. Thank you very much.

Speaker 3

Thank you, John.

Speaker 0

Your next question comes from Pete Heckmann with D. A. Davidson.

Speaker 3

Hey, good morning, everyone. Great results. That last question on market share gains, on the capital markets side, do you feel like those share gains are more weighted towards just capturing a greater share of the new issues? Or there's also a contribution from competitive takeaways of existing public companies?

Speaker 6

Well, I I think they're they're both. So if you sort of think the transactional side is really your first question. In robust markets, we we tend to do very well. Again, the quality of those deals, the deal team, our sort of place in that nexus of, you know, compliance and regulatory, we we do really well transactional side, and and we're seeing that right now. The second part of your question is on the compliance side, which is the ongoing reporting need.

We've said on prior calls that we have increased share. We did that in '20 from '19. We did it in q one, from '20, and we saw that again. So we continue to increase the number of public companies working with us. It's both taking share as well as retaining companies, newly minted companies, whether it's IPO or DSTAC.

Speaker 5

Got it. Got it. Okay.

Speaker 3

And then just on the on the regulatory outlook, it's good to see 33 and $4.98 almost in the rearview mirror. Anything that we should be watching over the next, let's say, eighteen months in terms of proposed new rules that could either be a tailwind or a headwind for defense?

Speaker 6

Yeah. I'll start it out. And we monitor what's happening at the SEC very closely. They're in a modernization process. You know, we're in very closely making sure that our products Ford's on a call today, making sure that our products are are ready for that, and and we are.

I think it's an opportunity for us. There's certainly, you know, nothing that we see as as a net negative. They're talking about ESG. They're talking about additional XPRL requirements. So we're monitoring those.

None of those have been proposed. So it typically is a proposal at 90 to, you know, many months long process to comment before there's a rule change. So we're certainly very far out from anything that that would have any substantive change. What we hear, I think, is is in that part of it as people have to disclose, and report more. Transparency is great.

Speaker 2

Yeah. I add to that. You know, think when you when you ask, you know, relative to eighteen months, tough to exactly pinpoint the timing. But, you know, Craig's last comment about enhanced transparency disclosure, tagging of data, you know, we feel very positive about some of the things that have been discussed and that are being discussed but not yet proposed. And I'm sorry, Eric, I think you had a couple of things to say.

Speaker 7

Yes. Thanks, Dan. And Pete, thanks for the question. I would just say on the GIC side of things, as Craig mentioned, we as well stay very close with the regulators. And we see our software, as I mentioned earlier, it's about operationalizing the reg requirements.

So we stay very close with U. S. Regulators as well as EU. As far as the near horizon, certainly there's a lot of things in comment period and we'll stay close to it. But again, our software is set to really help our clients tackle any regulatory change that comes their way.

Speaker 5

Got it. That's helpful. I'll get back in the queue.

Speaker 4

Thank you.

Speaker 0

Your next question comes from Raj Sharma with B. Riley.

Speaker 4

Hi, good morning, guys. Congratulations on another solid quarter. Thank you, Raj.

Speaker 6

I wanted to I I wanted

Speaker 4

to understand the the the print declines a little bit better. I I it was was some of the decline moved from q two the to the second half of the year. It's my recollection. I thought that there was going to be sort of a bigger proactive decline in Q2 of print. And so what is remaining for the balance of

Speaker 5

the year? Could you talk about that?

Speaker 3

Yeah, Raj. It's Dave. So when you look at the overall print numbers, you know, there's a couple of things going on there. One is the impact of the regulatory regulatory change, right, which was '33 and April a, that $130,000,000 or so. We're about 60% of the way through that.

Now you have a couple of things going the other way. You know, we pointed this quarter specifically that the transactional environment in capital markets remain strong. And so there was some incremental print on a year over year basis reflected in the numbers too. So I, you know, I think when you look at look at going forward on that $130,000,000 of print decline this year, we said we're roughly 60% of the way through it. And so that last 40%, or, you know, roughly $5,050,000,000 dollars, over over the next couple quarters.

Speaker 2

I and I think I'd add to that. Just just add to that is, you know, some of that variability outside of the regulatory change, you know, does demonstrate the benefit of variabilizing the print platform as we've done. And so, you know, to Dave's prepared comments, you know, we now have a very nice digital platform for higher value, quicker turn types of needs, and then we're able to go into the marketplace to scale up and and obviously, you know, scale down as as demand dictates.

Speaker 4

So is it fair to fair to say that the net reduction, in print this year would be could is actually looking to be less than a 130,000,000 simply because of the uptake in transactions.

Speaker 3

Yeah. That's that's the right way to think about it, Raj.

Speaker 4

Okay. Thank you. And then on on your the q three guidance, any particular reason why the margins would you're expecting the EBITDA margins to be, you know, 500, 600 basis points lower? Or did that catch that right than Q2?

Speaker 3

So it's we said low low to mid twenties similar to last year's Q three. You know, again, I think when you look at the way transactional has gone over the last several quarters, we've had $90,000,000 plus, I think now for for at least three quarters in a row. While, you know, the the market remains strong in July, you know, Q Q three always tends to be a little bit lighter. And so, you know, that business mix is, you know, always an issue we're we're watching. And, you know, like we've talked about before, the transactional work, is a little unpredictable.

Although, you know, we're still we're still bullish on the outlook, but, you know, wanna wanna just make sure that we're gonna deliver against, our guidance.

Speaker 4

Right. So so, fair to say that the margins are almost entirely predicated upon the transaction, part of the business and which is the wildcard sort of. But you see a, but you see good strength in that in q three so far?

Speaker 3

We yep. Yeah. So far, we do. I would say the other aspect is the, the growth that we drive on the software solutions revenue comes through at very high incremental gross margins and flows through to EBITDA. But like you said, the biggest wildcard would certainly be transactional.

Speaker 4

Great. Thank you for answering my questions. Great quarter again. Thanks, Raj. Thanks.

Speaker 0

Your next question is a follow-up from Charlie Strauzer with CJS.

Speaker 5

Just drilling down a little bit more on the Q3 guidance, Dave, if you could maybe some thoughts on your assumptions for each segment. How should we think about building up the model from a segment basis there? And then picking up on the transactional side, what are you assuming for transactions for both like IPOs as well as M and A? Obviously, M and A has been a very big seeing a very big pickup Maybe give us some thoughts on that side as well. Yes,

Speaker 3

sure. So if I go segment by segment, we would expect both of the software segments to continue to increase pretty substantially in Q3. And then when we look at the investment companies compliance and communications management segment to the earlier point around the regulatory impact on print. I think the declines there would be similar to what we've seen so far this year. And then again, biggest wildcard would be in the Capital Markets Compliance and Communications Management segment.

Certainly expecting to see growth in Q3. The comps do get tougher as we get into Q3 and also into Q4. But at a high level, you know, think the growth in software, the growth in capital markets compliance and communications management and again a little bit of that offset by the decline in Print, which predominantly hits in Investment Companies Compliance and Communications Management. And then, you know, specific to transactional for Q3, you know, I mentioned that you look over the last three or four quarters we had. It's actually the last three quarters starting in Q four last year and in the first February of this year, in excess of $90,000,000 in in transactional sales.

That's that's a that's a pretty big number, pretty robust market there, that we've seen over the last three quarters. Think, you know, looking specific at that transaction, that would be a a stretch to get there this quarter. But like I said, we we we started off strong in July. And, you you know, to the extent that the market holds up, you know, we'd probably be looking in the call it 80 to $90,000,000 range on transactional.

Speaker 5

Right. Obviously, you got you should see the traditional kind of, you know, tail you know, tail down for the, you know, summer vacation doldrum, so to speak, too.

Speaker 3

Yep. That's right.

Speaker 5

Great. Thank you very much.

Speaker 3

Thank you.

Speaker 0

At this time, there are no further questions. I will now hand the call back to management for closing remarks.

Speaker 2

Great. Thank you, Ashley. Thank you all for joining us, and we'll look forward to speaking to you in November. Thank you.

Speaker 0

That concludes today's conference. Thank you for your participation. You may now disconnect.