Ladies and gentlemen, thank you for standing by, and welcome to the Donnelley Financial Solutions Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Justin Ritchie, Senior Vice President, Investor Relation. Thank you. Please go ahead, sir.

Thank you. Good morning, everyone, and thank you for joining the Donnelley Financial Solutions Third Quarter 2020 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 uncertainty. For a complete discussion, please refer to the cautionary statements included in our earnings release and further details in our annual report on Form 10-K, 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. I'm joined this morning by Dan Leib, Dave Gardella, Kami Turner and Tom Juhase. I'll now turn the call over to Dan.

Thank you, Justin, and good morning, everyone. From all of us at DFIN, we hope that you and your families are staying safe and healthy. I'm very pleased with the company's performance for the quarter, which included both a return to more normalized levels of growth in software sales and a significant increase in transactional activity, driven by a robust IPO market. The influx of higher-margin tech-enabled services and software solutions net sales, our proactive pruning of low-margin print work, along with the significant impact of our ongoing cost control efforts, resulted in third quarter non-GAAP adjusted EBITDA margin of 22.7%, an improvement of 680 basis points from last year's third quarter. Total sales were up nearly 7% from last year's third quarter as the pickup in IPO activity that began in June accelerated in the third quarter, boosting sales across our transactional offerings globally. Strong capital markets transactional market activity and robust market share performance resulted in overall transactional sales growth this quarter, the first quarter of year-over-year growth since the third quarter of 2018. Software Solutions sales totaled $51.1 million, marking an all-time quarterly record for DFIN. The sales growth in software solutions of 10% was more in line with our historical growth rate, led by the recurring compliance products, primarily FundSuiteArc and ActiveDisclosure, growing a combined 12.7%. In addition, our data room product, Venue, achieved an all-time high for quarterly sales and grew by 8% year-over-year, its highest growth quarter since the fourth quarter of 2018. This growth was largely driven by an increase in announced M&A deal activities starting late in the quarter, combined with a strong IPO environment. The additional steps we took earlier this year to optimize our operations, including streamlining our organizational structure and real estate footprint, are reflected in our third quarter…

Thank you, Dan, and good morning, everyone. As Dan mentioned, we delivered very strong third quarter results, including significant year-over-year increases in non-GAAP adjusted EBITDA, non-GAAP adjusted earnings per share, operating cash flow and free cash flow. We maintained strong market share in our transactional filing business and grew our software solution sales, all while continuing to focus on driving operational efficiencies. These efforts resulted in a 680 basis point improvement in our third quarter non-GAAP adjusted EBITDA margin compared to the third quarter of 2019, further extending the trend we established in the second half of 2019 and further demonstrating the strength of our business. On a consolidated basis, net sales for the third quarter of 2020 were $209.5 million, an increase of $13.6 million or 6.9% from the third quarter of 2019. Software solution sales in the third quarter increased by $4.5 million or 9.7% compared to the third quarter of 2019, primarily due to increased fund activity and product adoption within FundSuiteArc, an acceleration of room activity in Venue as well as solid subscription growth in ActiveDisclosure and price increases in our other compliance software offerings. Tech-enabled services sales increased by $20.6 million or 24.6%, primarily due to increased capital market transactional and compliance activity. Print and distribution revenue decreased by $11.5 million or 17.6%, primarily due to lower demand for printed materials with investment markets, including less commercial printing where we have proactively exited certain low margin contracts, rightsizing our production footprint in advance of the anticipated reduction in print demand related to the regulatory changes from Rule 30e-3 and 498A. Third quarter non-GAAP gross margin was 46.4% or 830 basis points higher than the third quarter of 2019, primarily driven by favorable business mix featuring higher-margin tech-enabled services and software solution sales, combined with lower…

Thanks, Dave. I'd like to highlight a few items, and then we'll open it up for Q&A. Regarding the upcoming regulatory change that will reduce demand for print in 2021, we are well prepared. We continue to expect a reduction in print-related net sales of approximately $130 million to $140 million in 2021 and a reduction in non-GAAP adjusted EBITDA of approximately $5 million to $10 million related to the regulatory change. We are on plan and, in some cases, ahead of plan as it relates to delivering the cost savings associated with rightsizing our platform. And I remain confident in our ability to meet or exceed the plan. In addition, I'm excited about the pace of development of and demand for our software solutions. As we mentioned in our earnings release, we signed the largest ever software solutions customer contract in the company's history. This multiyear, multimillion-dollar contract further deepens a key investment company's client relationship and represents an expansion of their end investor financial reporting capabilities on a global basis, leveraging our ArcReporting solution. We also saw a significant demand from our investment companies clients for our recently released ArcDigital solution, as clients look to DFIN to help transition their document composition and distribution workflows to a post 30e-3 environment, where distribution of printed documents will be significantly diminished. The Venue team recently announced a first-of-its-kind data privacy assessment tool for our virtual data room offering. Venue continues to transform how companies meet their data privacy obligations by scanning data room content to find personally identifiable information. After automatically identifying and visualizing potential exposure, Venue now empowers professionals to instantly redact sensitive data. Our clients are thrilled about the ways this tool makes their job significantly easier and allows them to get ahead of near constant regulatory changes.…

[Operator Instructions] Your first question comes from Pete Heckmann of Davidson.

I appreciate the comments on the outlook. Certainly, it looked like October's IPO activity was really strong. Can you talk about any particular comparisons that you might have with the last year in terms of large projects in either capital markets or the investment side?

Yes. Pete, nothing specific as it relates to large transactions that we might have had last year. I think when we look at the outlook for the fourth quarter, as you commented, October IPO market was very strong. I think when you look at just some of the uncertainty across the economic landscape, whether it be related to the election, the uncertainty around the results at this point, et cetera, we typically see a slowdown around the election period. And so we're just taking a cautious approach to Q4. And then on top of it, in addition to the expectation of a little softer transactional market, more of the low-margin print work that we're exiting, we saw that happen in Q3. More comes out in Q4. And so that's what's really behind the guidance with the expectation that, from a software perspective, we'll continue to see growth.

Right. Right. Okay. That makes sense. And then just in terms of -- I can't remember -- I may have missed it if you mentioned it, but some of the work on enhanced disclosures in the investment world that the SEC is looking at, how do you see DFIN playing a part in that? And are you proactively trying to shape the discussion of how these enhanced disclosures could be -- enhanced investor disclosures could be designed?

Yes. So it's a great question. So when we think about 33 and 498A, which are in process now going effective in 2021 and what sits behind the large reduction in print and a software opportunity that's in front of us in 2 of our products within the Arc Suite, it does allow us to solve clients' digital content management and distribution needs, and those sales efforts are proceeding well. We would view the new proposal on investor experience, that enhanced disclosure, similarly that it offers opportunity for us to further deepen relationships via our software products.

Your next question comes from Charlie Strauzer of CGS Securities.

Just a couple of things. First, if you could drill into the margin expansion year-over-year in the quarter a little deeper, maybe look at this in terms of how much of that was really transactional-related versus software or other. Just give us a better sense of how much of that margin kind of expense related that was expenses coming out of the equation versus just pure pickup and mix, that kind of thing.

Yes. So Charlie, I'll start, and then if Dan wants to jump in. I think when you look at the biggest year-over-year delta from an earnings perspective was the cost takeout. And I should reiterate that the vast majority of that cost takeout is permanent. We're obviously benefiting a little bit from a travel and entertainment perspective given the virus. But the cost takeout numbers are significant and mostly permanent. That obviously does get offset a little bit by some of the incent comp, and we also have a 401(k) plan that's also performance based. And just given the tremendous performance, that expense is up for the year. And as it relates to transactional, most of that obviously came through the equity side in the form of IPOs. I think revenue there was up probably $11 million, and that revenue typically comes through at a very high incremental margin. And so that's probably in the $8 million to $9 million range of increased profitability, which then gives you some sense that, back to my earlier comment, that the cost savings in the quarter is larger than that.

Yes. So you can leverage that nicely. And then obviously, has done a good job of taking the cost out, not only through the pandemic but prior to that, but how much more costs are kind of yet to come? Or do you think you've identified or taken out what you need to kind of to put you in a good place?

Yes. So just to add on to a bit of Dave's comment as well and it addresses this question, the -- if you look on the software side and the efficiencies that we've gained, we would expect to see strong incremental margins from software sales growth. But you look at the margin, and we're driving it, as Dave mentioned in his comments, from operating efficiencies within the software, we've replaced some -- a partner relationship with our own software capabilities. And that's led to very good flow-through on sales -- profit flow-through on sales. In regard to the -- your last question, we -- the biggest thing we have in front of us from a demand perspective on the negative side is the 30e-3 and the print side, which we've been aggressively managing toward, feel very good about our plan there. We do have some actions that will be coincident with the regulation going into effect that we've been managing towards throughout this year. And then we'll continue to stay very disciplined on the cost side as we always do. And as we see growth in software, it's great to see the flow-through coming through at a much higher level, given the efficiency efforts that we've we put in place. And it's really just getting much higher velocity off of our investment in development dollars.

That's great. And then just one last one for me, if I could. Software solutions, you said you signed a large deal in history. Just kind of looking at new sales, has the pandemic helped you guys at all in terms of driving people from in-house to outsourcing? Are you seeing kind of a pickup more on inbound sales calls related to that?

Yes. So it's interesting. So the contracts that you referenced, that will have bigger -- has a little bit of an impact in this year, but really, full year impact starting in 2021. And it's our -- given the business unit it's in, it's a 3- to 5-year type of contract. We did see at the height of the pandemic, some negative impact on software sales growth. Part of that relative to Venue was the M&A environment that we've seen now improve in September from an announced deal perspective. And then even on our recurring compliance product, we did see at the height of the pandemic slower willingness of clients to move or go deeper on some of the product lines. That's largely past us now. And so to your point, now that you start to see where the discussions take place on ways of -- to use your term, outsourcing or increasing the amount that we can help our clients digitize their business and move forward with our software solutions.

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

I wanted to understand a little bit about the -- so on the transactional side are you seeing any difference or change in the pricing per transaction? Or in the revenues that you get for the transaction, has that changed at all? And then just wanted to drill a little bit into the fourth quarter that you are projecting or that you're guiding. Is the transactional revenues there? Are they -- are you assuming a flat? Or are you assuming a down versus this quarter? And then I have a follow-on question about the print.

Yes. Right. So sure. So when -- regarding your question on transactions, I think when you look at the fourth quarter and what's baked into the outlook here, yes, we are expecting transactions to be down from the third quarter of this year. And again, I think when you look at the total decline, like I said, it's -- part of it is driven by the low-margin print work that we're exiting as well as this decline in transactional, again, with growth -- a little bit of growth on the software side.

Got it.

Yes. And Raj, just to add on to Dave's point, on the -- your question on pricing, we're really not seeing a change on a unit pricing basis. I think it's much much more. There is a mix impact, so depending upon what's in the hopper or the Q. But on a unit pricing basis, not seeing an impact. And we've adjusted. We were the first one out with the virtual IPO process. We talked about that a bit on our last call, and that's just been a great example of how we've adapted in the environment. We're seeing some demand to get back in person, but still the vast majority of interest is to continue doing things virtually.

Right. And then on the decline in print, is that similar in Q4 that you had a decline in Q3?

That actually probably accelerates a little bit more in Q4 relative to what we saw in Q3.

And how does that split between the compliance side of the business and on the transaction side? I would assume most of that is in the compliance side.

No. So most of it will show up in the global investment companies business where we have commercial printing rolling up there.

Your next question comes from Jake Williams of Wells Fargo.

I just wanted to focus on that large contract -- software contract with an investment company, particularly on the revenue drivers. Are there any annual price escalators on the next 3 to 5 years? Or is that kind of a flat subscription?

Yes. We wouldn't get into particulars on a contract, but we're very comfortable with the pricing on it. And I think more importantly, what it does for our client adds tremendous value as the systems do from an efficiency and cost perspective. And so we're comfortable with the price that we've been able to achieve.

Okay. Is there any volume component to that revenue model there? Or is it more kind of a pure subscription model?

No. There are volume components. So as we've talked in the past about in this part of the business, there is a price per fund and then the number of funds that are loaded. And there's implementation as well.

Got it. And it sounds like there was probably no revenue contribution from that contract in 3Q, maybe a little bit in 4Q, but most of the impact will show in 2021?

Correct.

Jake, let me just clarify there. So that contract was with an existing customer. So it's not a net new. Some of the growth aspects of it will be net new for us in terms of the mix and the impact on revenue. But that -- we're doing work for that client today.

There are no further questions at this time. I turn the call back over to the presenter.

Okay. Thank you. And we'll look forward to speaking with you at -- in February following the fourth quarter and in the interim. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.