Donnelley Financial Solutions Inc

NYSE:DFIN

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the Donnelley Financial Solutions First Quarter 2018 Results Conference Call. My name is Jason, and I will be your operator. [Operator Instructions]. Also please note that this conference is being recorded. And I will now turn the call over to, Sanja Burklow. You may begin.

[Sanja Burklow, IR]

Thank you, Jason. Good morning, everyone, and thank you for joining Donnelly Financial Solutions First Quarter 2018 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 dfsco.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 statement included in our earnings release and further detailed in our annual report on Form 10-K and other filings with the SEC. Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP results provides you with useful supplementary information concerning the company's ongoing operation, 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 press release and related footnotes for GAAP information and a reconciliation of GAAP to non-GAAP information. I'm joined this morning by Dan Leib, Dave Gardella, Tom Juhase and Kami Turner. I'll now turn the call over to Dan.

[Daniel Leib, President, CEO & Director]

Thank you, Sanja. Welcome back, and good morning, everyone. As noted in this morning's press release, our first quarter results were consistent with our expectations, as is our outlook for the rest of the year. So our full-year 2018 guidance remains unchanged. Specific to our first quarter performance, I'm particularly pleased with the revenue growth in our SaaS offerings, where we continue to achieve double-digit growth as well as with our worldwide Language Solutions offering where we achieved double-digit growth in the quarter. The growth in these areas was offset by declines in print revenue, primarily related to the first quarter of 2017 special proxy volume within U.S. Investment Markets that, by its nature did not recur this year. We believe the secular reduction in print continues to be in the 4% range. The overall change in revenue mix, a heavier weighting of services versus products resulted in a gross margin increase of 130 basis points.

From an overall market share perspective, we are trending flat for last year, so the decline in first quarter revenue is primarily reflection of the difficult comparison to the first quarter of 2017, where our organic growth rate was 11.9%. In aggregate, revenue from our SaaS offerings grew by 11% in the first quarter and now represents 15.2% of our total revenue. The first quarter growth in these offerings was primarily driven by ActiveDisclosure in Venue, which grew by 17.1% and 18.7%, respectively on a worldwide basis. We are pleased with the progress we continue to make in growing these recurring revenue streams. The large opportunity in front of us is to continue to drive change and evolve our business model to leverage our domain expertise, service and process knowledge to support our clients, the way they want to work as they migrate further into the digital world.

With respect to our operating plans, I'd like to reiterate our key priorities. We will continue to build on the sales momentum that we have created in the areas where we have seen significant growth in our recurring revenue offerings, such as our Venue Data Room, ActiveDisclosure and our content management solutions within our investment markets reporting unit. We will continue to invest in and make enhancements to our software as a service solutions. We expect such enhancements to be the result of a combination of organic investment, M&A and expansion of our relationships with strategic partners. We will continue to aggressively pursue transactional and compliance activity within global capital markets. Within the transactional market, we are well-positioned to capture additional revenue as market activity improves. Last, as we noted in February, we are looking to accelerate our investments in terms of both operating expense and CapEx. Targeting opportunities that can drive long-term profitable growth. We plan to discuss these opportunities as well as the disciplined process that Gates investment in more detail in a few weeks at our inaugural investment day. But let me share a few highlights. Within investment markets, we continue to invest in enhanced capabilities within our N-PORT N-CEN platform, which will be launched for June 2018 production cycle.

We are also looking to expand the platform targeting a single solution to address our clients' global regulatory requirements. With our recently deployed data ingestion tool, we are enabling our Investment Markets clients to on board more seamlessly and construct a single source of their data. The tool enables clients to easily organize entity level data taken from multiple sources, then view, compare and analyze it between entities across different timeframes. The tool will be a module of our FundSuite Arc platform in the near future. We're also investing in our automation platform to onboard funds to our shareholder reporting platform. The platform consists of a set of technology concepts designed to automate repetitive business processes in order to increase execution speed and improve both the quality and consistency of business results for our clients. In capital markets through the introduction of machine learning and artificial intelligence, we will improve the efficiency of XBRL tagging and align with the efforts at the SEC to move from documents to data. This investment will provide a launchpad for additional value-add and analytics including combining clients' financial and nonfinancial data to organize information that board members, CEOs, CFOs and Investor Relations professionals need to manage the business and better understand the market landscape.

We leased an early 2017 our asset-backed security or ABS platform, provides asset-backed filers with an end-to-end solution for data validation, testing and life filing in accordance with the SEC's requirement. In 2018, we are investing in technology that will further evolve our platform to keep pace with the SEC rule changes and modernization, delivering market-leading workflow and validation improvements. These are just a few examples of new and innovative solutions that we are bringing to market. As I mentioned earlier, we're excited to discuss these opportunities in more detail at our invest day. I should also note that, while we are committed to aggressively pursuing these growth initiatives, we will do so with a disciplined approach to managing our cost structure and deploying capital. I've highlighted this perspective on previous calls and want to reiterate that our approach in these areas is unchanged. With that, I will turn it over to Dave. Dave?

[David Gardella, EVP & CFO]

Thanks, Dan, and good morning, everyone. Before I discuss our first quarter performance, I'd like to recap 2 accounting standards that we adopted during the first quarter of 2018. As of January 1st, we adopted the new revenue recognition accounting standard, using the modified retrospective approach applied the contracts that were not completed as of January 1, 2018. Prior periods continue to be reported under the accounting standards in effect for those periods. In the first quarter, this change did not have a material impact on revenue in either of our U.S. or international segments or on the consolidated results in total. There was, however, a notable impact at the U.S. reporting unit level, positively impacting U.S. capital markets revenue by approximately 580 basis points and negatively impacting U.S. Investment Markets revenue by approximately 590 basis points.

As of January 1, we also adopted a new accounting standard related to retirement benefits, which resulted in the presentation of pension income within investment and other income in the statement of operations instead of in G&A expense. Pension income was also reclassified for all the prior periods reporting in the earnings release and will also be reflected this way in our 10-Q. Now I will discuss our first quarter results. As Dan mentioned earlier, we are pleased with our first quarter performance, which was our toughest quarter from a year-over-year comparison perspective as we reported 11.9% organic growth in last year's first quarter, driven by an improved environment in our U.S. capital markets offering, where we achieved 11.5% revenue growth and 2 mutual fund special proxies in our Investment Markets reporting unit where we reported 9.9% growth. On a consolidated basis, net sales for the first quarter of 2018 were $255.2 million, a decrease of $12.1 million or 4.5% from the first quarter of 2017.

After adjusting for changes in foreign exchange rates and the impact of the adoption of the new revenue recognition standard. Organic sales decreased 6%, driven by special proxy volume that positively impacted U.S. Investment Markets in the first quarter of 2017, and did not recur this year, as well as lower transactional and compliance volume in U.S. capital markets, partially offset by growth in our SaaS and global Language Solutions offerings.

First quarter gross margin was 37.9%, or 130 basis points higher than the first quarter of 2017, as a favorable mix between services and products revenue, as well as cost reduction initiatives more than offset increased investments in our technology function. Non-GAAP SG&A expense in the quarter was $56.3 million, $2.6 million higher than the first quarter of 2017. As a percentage of revenue, non-GAAP SG&A was 22.1% or 200 basis points higher than the first quarter of 2017. The increase in SG&A was primarily driven by investments and support of our strategic priorities. Our first quarter non-GAAP adjusted EBITDA was $40.3 million, a decrease of $3.9 million from the first quarter of 2017. Non-GAAP adjusted EBITDA margin in the quarter of 15.8%, was 70 basis points lower than the first quarter of last year, primarily driven by the operating leverage impact of lower revenue and investments in support of our strategic priorities, partially offset by a favorable mix between services and products and our cost reduction actions.

Turning now to our segment results. Revenue in our U.S. segment was $213.1 million in the first quarter of 2018, a decrease of 7.5% from last year's first quarter. On an organic basis, after adjusting for the impact of the new revenue recognition standard, revenue declined 7.9%. Our Investment Markets reporting unit reported an organic revenue decline of 9.6%, primarily driven by the 2 special proxies in the first quarter of last year that did not recur this year, which was, partially offset by growth in content management services. Revenue in capital markets declined 7.1% on an organic basis, driven by lower transactional and compliance volume, only, partially offset by double-digit growth in Venue and ActiveDisclosure.

Language Solutions and other reported revenue decline of 1.8%, as continued growth in our Language Solutions revenue was more than offset by a decline in commercial print. Non-GAAP adjusted EBITDA margin for the segment of 19.8% decreased 120 basis points from the first quarter of 2017, primarily due to the operating leverage impact of lower revenue and investments in support of our strategic priorities, partially offset by our cost savings actions. Revenue in our international segment was $42.1 million in the first quarter of 2018, an increase of 14.1% from the first quarter of last year. On an organic basis, excluding the favorable impact of changes in foreign exchange rates, and the new revenue recognition standard, revenue in the first quarter grew 5.7%, primarily due to growth in the non-U.S. portion of our Language Solutions offering. Non-GAAP adjusted EBITDA margin for the segment of 9%, increase 280 basis points from the first quarter of 2017, primarily due to favorable mix of work in our cost savings actions.

Our first quarter 2018 non-GAAP unallocated corporate expenses, excluding depreciation and amortization were $5.8 million, a decrease of $0.6 million from the first quarter of 2017. Consolidated free cash flow in the quarter was a use of $60 million, $17.5 million unfavorable to the first quarter of 2017. Relative to last year's first quarter, the higher use of cash was primarily due to higher performance-based compensation payments related to 2017 plan achievement as well as higher spin off related transactional expenses. This was partially offset by improved working capital management and lower interest payments related to both our debt reduction and the reduced interest rate on our term loan, which was repriced in October of 2017. We ended the quarter with $478.8 million of total debt, including $20 million drawn on our revolver, and we had net available liquidity of $211.9 million. As of March 31, our gross leverage was 2.9x, up 0.2x from year-end 2017 and down 0.6x from a year ago. The increase from year-end was driven by normal seasonality of our cash flow, and we continue to target a gross leverage ratio in the range of 2.25x to 2.75x and expect to be within that range again in the back half of this year.

As highlighted in this morning's press release, we are reiterating the full year 2018 guidance that we previously provided, while there is no change to our guidance, I will recap our expectations. We expect 2018 revenue of approximately $1 billion, representing organic growth in the range of 1% to 2%. We expect our non-GAAP adjusted EBITDA to be in the range of $165 million to $175 million. Depreciation and amortization is expected to be approximately $50 million. We expect interest expense of approximately $37 million. Our full-year non-GAAP tax rate is expected to be in the range of 29% to 31%. We project the full year fully diluted weighted average share count to be approximately 34 million shares. And lastly, we expect capital expenditures in the range of $40 million to $45 million and free cash flow in the range of $55 million to $60 million. Our guidance continues to assume investment spending targeted to drive long-term profitable growth, and as Dan noted earlier, we will maintain a disciplined approach, as we evaluate each of the opportunities. And with that, I'll turn it back to Dan.

[Daniel Leib, President, CEO & Director]

Thank you, Dave. I want to reiterate our key priorities for 2018, which are driving growth in our current offerings due to product development in sales and marketing, accelerating our innovation efforts infusing our platform with powerful emerging technologies, to provide our clients with insights and to maximize efficiencies. Investing in our employee base in order to ensure we deliver these capabilities in a comprehensive and cohesive platform, while at the same time being prudent from a cost perspective. Before we open up the lines for Q&A, I want to again remind everyone that we are hosting an Investor Day in New York on May 22, during which we will discuss the company's strategy and growth opportunities in more detail. Additional information regarding the event can be found on the Investors section of our website. We hope to see you there. And with that, let's open up the line for Q&A, please.

[Operator]

[Operator Instructions]. And first, we have Charles Strauzer from CJS Securities.

[Charles Strauzer, CJS Securities]

If we could talk a little bit about the kind of current trends in Q2 just, and also as you look at kind of top line in EBITDA for Q2, are there any kind of difficult comparisons like we had in Q1 with the proxy that we should be factoring it better.

[Daniel Leib, President, CEO & Director]

Thanks, I will kickoff on it Charlie and then Dave and Tom can way in. From an activity level, we have seen increased transactional activity deal announcements et cetera whether those hit within Q2 or later in the years is always tough to call but it is a positive from a pipeline perspective than a general activity level. And thinking more broadly about the business, there's nothing one-time in nature that was popping up last year, certainly, there's always large deal activity that can influence a quarter, but it's not the magnitude certainly that we had 2 years ago in Q2 with large projects.

[Thomas Juhase, COO]

And Charlie, just to reiterate and nothing extraordinary in Q2. We talked about the ramping up of some of the investment spending, CapEx was a little bit lower than we expected in the first quarter, we will expect that to start to ramp up in Q2 along with some of the operating expense investments starting to ramp up in Q2 as well.

[Charles Strauzer, CJS Securities]

And some of the operating expense is going to be seen where -- mostly in SG&A?

[Daniel Leib, President, CEO & Director]

Mostly in SG&A, yes.

[Charles Strauzer, CJS Securities]

Got it. And then if you look at kind of the adjusted comparisons of last year in the capital markets in the transactional side of the business, Tom maybe talk a little bit in terms of current trends on that front, are we always seeing kind of similar trends? Are we kind of flattish from that perspective or possibly could be -- maybe it's even a little bit of growth this year?

[Daniel Leib, President, CEO & Director]

Yes, sure. So the activity levels as mentioned are increased and as we look in our -- in the chain of activity that takes place within our shop and so calling the exact quarter, those will hit is a bit tough but we're encouraged by the activity in the pipeline.

[David Gardella, EVP & CFO]

Yes, I guess with respect to Q1, Charlie, part of the impact that we saw on organic revenue decline in capital markets was really influenced by the transactional work that was down roughly $5 million or $6 million on a year-over-year basis. But as Dan said, from a momentum perspective, starting to see more activity as we get into Q2 here.

[Daniel Leib, President, CEO & Director]

Yes. The only thing I'd add is that the dynamic in the business is filed and priced so when you think about the transactions we get. So I think there may have mentioned we increase in the number filings, but they have to price in order for them to come through our shop to get paid.

[Charles Strauzer, CJS Securities]

Understood. And then maybe [indiscernible] into that the competitive environment, just any updates there in terms of anymore increased competition there, particularly on the Venue side and also in the transactional side.

[David Gardella, EVP & CFO]

Yes, sure. So I'm starting with Venue. Our growth rate in the market data is not great, so we are surmising our growth rate in the 17% range. We feel like represents more than our fair share, more than the market activity, so we feel like we are taking share and that's a continuation of what we have seen over time in Venue. So we are encouraged by that and market is pretty competitive but we feel good with our positioning there. And as it relates on the transactional side, no real changes in the broad competitive dynamic. On the compliance side, we've talked about the stabilization predominantly on the software side within compliance and we did have a good first quarter. We were a net positive on customer wins there and that's building off of, I think, we talked previously that in 2016, we saw leveling off of net losses and we've seen a continued success rate in bringing customers back to the platform in the first quarter of 2018.

[Operator]

Next we have Michael Cho from JPMorgan.

[Michael Cho, JPMorgan Chase & Co.]

Just a quick follow-up on what you just said around the capital markets compliance. I thought, I heard the first quarter was net positive in terms of customer wins. Can you provide a little color around that comment versus the lower compliance volumes that help drag [indiscernible].

[Daniel Leib, President, CEO & Director]

Sure, yes. So there is a bunch of factors that impact compliance volumes within any given quarter. Some of it is actually driven by deal activity, which has associated compliance filing requirements. When we look at the competitive wins in the quarter, we break it out into direct competitive wins and also then losses that result from delistings, bankruptcies, mergers and acquisitions and so when we look on a direct win basis -- or an aggregate win basis, I should say, this was one of the stronger quarters that we have had in the past several years. It -- it's in the range of dozens of net wins on a customer basis.

[David Gardella, EVP & CFO]

Yes, Michael, one thing to add last year, there was also some larger proxy volume that we had on the capital market side that was lower revenue number this year.

[Michael Cho, JPMorgan Chase & Co.]

And I get just one follow up I guess around that -- around the SaaS-based stock. I think maybe -- can you just give a little color on the pricing landscape as well?

[Daniel Leib, President, CEO & Director]

Yes, I think, from a pricing perspective, we don't see a significant amount of pricing pressure from time to time as some of the contracts we knew on the investment markets side, as funds are looking to drive cost out of their own operations. We do engage in those discussions but often those discussions are actually helpful from our contract perspective as we can implement more the modules and the capabilities of the FundSuite Arc platform to kind of replace some of the internal costs that of our clients have. They outsource it to us and net-net drive some of that cost savings that they were looking to achieve without necessarily impacting the absolute pricing.

[Operator]

And next we have Peter Christiansen from Citi.

[Peter Christiansen, Citigroup]

I was hoping that you could tie together some of the stats I guess on U.S. Capital Markets, it looks like listed IPOs were up 50% year-over-year versus last quarter. Is that a timing issue? Is it related to your business or have you seen any changes in share or competitive wins or losses?

[Daniel Leib, President, CEO & Director]

Yes, sure. So I will start and then Dave and Tom can jump in. So then Tom referenced that, which is a priced versus filed, so a lot of the activity that we're seeing announced now dovetails with my comments of an increase in activity that would be represented in filing activity and so we track the filing activity, we track different size of IPOs as well, given that well it's not a perfectly linear relationship generally speaking, a larger IPO has more activity for us. And so what you would be seeing in terms of results would be priced IPOs that hit any given quarter, and so that's a bit over the Delta.

[David Gardella, EVP & CFO]

And Peter, just wanting to add there, you are right, the number of -- even when we talk about the number of priced IPOs in the quarter from an overall market perspective definitely increased on a year-over-year basis, as did ours. I think one of the variables that always kind of comes into play is the complexity of each of the deals, which don't always -- the increase in the number of transactions don't always perfectly correlate to the change in revenue.

[Peter Christiansen, Citigroup]

Okay. And then I know you're talking about making a lot of these investments, and looking forward to the Analyst Day. Have you also considered potentially any dispositions -- disposals I'm sorry, and how do you evaluate your existing assets and I would almost segue that into your printing assets as you look at utilization capacity, do you believe you are at the right levels here for those assets?

[Daniel Leib, President, CEO & Director]

Yes, sure. I will take the first one on the dispositions or acquisitions, and on capacity and where we sit, Dave or Tom can take that one, I think, it's a pretty similar answer what we have given in the past. Regarding dispositions and acquisitions, we certainly wouldn't comment on any thing in particular. With that said, we are always looking at the portfolio, and we're very commercially minded as we do that.

[David Gardella, EVP & CFO]

Yes, I think, kind of along those same lines in terms of looking at the portfolio or looking at the assets we own, versus what we, the production that resource on the outside -- always looking to optimize that based on some of the trends that we're seeing for particular capabilities within the print market or the overall demand. But nothing to disclose at this point.

[Peter Christiansen, Citigroup]

Okay. And last one for me is you've mentioned that you have this pretty strict discipline towards looking at how you are thinking about ongoing investments in the business. Can you just broadly touch upon some of the criteria that is guiding you as you look to make these investments?

[Daniel Leib, President, CEO & Director]

Yes, sure. Let me start and then Dave can get into some of the specific criteria. Just from a process perspective, we -- and it will be probably easier to go through at the Investor Day, but we look for a series of investments that span across time and obviously, those investments that are further afield we're seeding and spending less money on them and the things that are closer and have a more certain return is where we feel comfortable adding more capital. It's done in a Stage-Gate process so we're willing to fund some early investments and then get a view of whether or not we should shut the investment off or accelerate it. So pretty standard Stage-Gate process, Dave can speak to some of the specific criteria, and then as you would expect, obviously, we're looking for how each of these investments may impact the business holistically.

[David Gardella, EVP & CFO]

Yes, so and I guess from an overall return perspective, we'd be looking to generate something in the, call it, mid-to high teens, obviously, depending on the execution risk there. We're implementing kind of post execution audits, the performance relative to the business plan and again, it's all around, as Dan pointed out, kind of these seed investments that we're exploring and then building out a stronger business case based on what we're finding, driving long-term profitable growth. And as I mentioned in Q1, we spent less CapEx than we expected, not that we didn't have a long list of ideas, we just didn't have a long list of ideas that met the criteria that we're looking for. So we're not going to spend the dollars just because we have an estimate out there. We are going to maintain that same disciplined approach around all of the capital deployment and cost structure.

[Daniel Leib, President, CEO & Director]

Yes, which was actually consistent with what we saw in 2017 where our capital investment came in lower than the guidance we had given and that was just a function of the Dave's point. The right ideas with the justified return and the right -- bringing in the right level of talent to complete some of those projects.

[Operator]

Next we have David Ridley Lane from Bank of America Merrill Lynch.

[David Ridley Lane, Bank of America Merrill Lynch]

I just had a question on CapEx. You maybe highlighted 1 or 2 things that are driving the step up in CapEx in 2018 and then would you expect CapEx to fall back down to 2.5% or 3% of revenue area in 2019?

[David Gardella, EVP & CFO]

Yes, so thanks for the question. So this year's guidance of $40 million to $45 million is primarily around -- the incremental is primarily around kind of the ramp up in the technology and innovation areas that a lot of which Dan talked about in his prepared remarks. We'll give longer-term guidance on that CapEx at the Investor Day, but the way we're viewing it now is that it ramps down over the next few years, probably closer to the $35 million range. But we would expect the $40 million to $45 million this year and then ramping down over the next few years back towards a $35 million number.

[David Gardella, EVP & CFO]

Yes, then a couple of things that obviously, influence that over time are M&A environment and so there's opportunity there. The M&A that may cause CapEx to be lower et cetera.

[David Ridley Lane, Bank of America Merrill Lynch]

Understood. And then any potential disruption around the Intralinks acquisition by a private equity firm?

[Daniel Leib, President, CEO & Director]

Yes, so as we talked broadly about Venue and it's a competitive environment, we do feel like with our 17-plus percent growth that we have been a net share taker. They're not the only ones in that market. We think we have a number of differentiating characteristics of our Venue Data Room, the eBrevia investment that we have and the analytics that, that tool allows, is one of them. There are others as well. So we respect all of our competitors. We do feel like we've taken some share and sometimes tough to tell exactly where it's coming from.

[David Ridley Lane, Bank of America Merrill Lynch]

Understood. And then on the -- just another quick numbers question on the adoption of the new revenue recognition standard. Should we expect the relative impact in first quarter to hold through for the next 3 quarters until you anniversary this or did you see an outsized impact in the first quarter?

[David Gardella, EVP & CFO]

So yes, there was an outsized impact in the first quarter as I mentioned earlier, on a consolidated basis, didn't have much of an impact, but certainly swings between capital markets and Investment Markets. We would expect some of that to reverse probably in Q2, just given the seasonality and then on a full-year basis, it should be close to net 0 impact. But we should see some of that reverse between Capital Markets and Investment Markets in the second quarter.

[Operator]

And our final question comes from Bill Mastoris from Baird and Company.

[William Mastoris, Baird and Company]

I'd like to circle back to Dan, one of the remarks that you made a little bit earlier about capital allocation, would it be fair to assume that absent any type of acquisition that all free cash flow is going to be applied towards debt reduction to get back into the targeted leverage range?

[Daniel Leib, President, CEO & Director]

Yes, so, I think, as you saw what we did in 2017, where the free cash was all directed towards debt repayment in the absence of M&A, that would certainly be the preferred place to put the cash.

[William Mastoris, Baird and Company]

Okay, and in the event that you were to find the ideal acquisition, how far are you willing to stretch that balance sheet?

[David Gardella, EVP & CFO]

Yes, sure. So, I think, we've talked through this on previous calls. So we have our guidance target of $225 million to $275 million and as were the same folks from -- that came from R. R. Donnelley and had a guidance target that we operated within, and we take that seriously. We guardrail our M&A activity by that and that included at times using equity as consideration. So we're very mindful of the balance sheet, we're also mindful that in a business that has some aspect that is cyclical in nature that a point in time estimate of what leverage looks like in 1 cycle or 1 part of the cycle, I should say, may look very different in another part of the cycle. So we take a thoughtful approach about it. I'm not going to throw a number out there, a lot of what would determine comfort with leverage in range is a mix of asset, right? And so it's tough to answer it in a number other than to talk about what our intention and direction is, and I think our leverage targets provide that for you.

[William Mastoris, Baird and Company]

Okay, then moving towards a more administrative question. Dave, what was the covenant that caused the deduction in the availability under the revolving credit facility?

[David Gardella, EVP & CFO]

Yes, the gross leverage target -- the gross leverage covenant. So if we would've borrowed more than the $211 million on the revolver that we would be kind of hitting that threshold average.

[William Mastoris, Baird and Company]

Thank you, and very last question, and that is would it be safe to assume that the free cash flow that is devoted towards debt reduction is all going to be on the term loan?

[David Gardella, EVP & CFO]

Yes. So there are two points Bill, $20 million on the revolver at this point. The bonds are nonfiled for another, I think, 3.5 years or so.

[Operator]

We did have an additional question from Bill Warmington from Wells Fargo.

[William Warmington, Wells Fargo Securities]

So a couple of quick ones for you. So what was the dollar contribution in first quarter '17 from the nonrecurring special proxy Investment Markets revenue?

[David Gardella, EVP & CFO]

Bill, I think it was in the $15 million to $20 million range between the 2 proxies in terms of overall revenue. And again, most of that is print related revenue.

[William Warmington, Wells Fargo Securities]

Got it. And then what's the client feedback then like on the new product features you have been investing in?

[Daniel Leib, President, CEO & Director]

Yes, sure. We have quite a few I think in the nutshell, clients have been happy with what we are putting together. We are not putting together an isolation, we are engaging with our clients and obviously, understand the regulatory requirements, given where we sit. So we've had a lot of very positive feedback. I referenced the data ingestions well in my comments. I referenced a couple of the projects going on in capital markets and also obviously, N-CEN, N-PORT, which is coming. And universally, we feel good about where we are from a development standpoint and the feedback has been positive.

[William Warmington, Wells Fargo Securities]

And then last one.

[Daniel Leib, President, CEO & Director]

Sorry, going back, I think I gave you a bad number on the proxy, it was closer to $10 million.

[William Warmington, Wells Fargo Securities]

$10 million, okay. And then last one here if I could get the percentage of total revenue that's now SaaS-based?

[David Gardella, EVP & CFO]

Yes. it's about 15%.

[William Warmington, Wells Fargo Securities]

1-5?

[David Gardella, EVP & CFO]

1-5 and just to clarify that number, that's a software number there. There's potentially more from a service content but been tough to manage -- tough to measure rather.

[Daniel Leib, President, CEO & Director]

Okay, with that, thank you all for joining the call and we look forward to seeing you on May 22 in the Investor Day. Thank you again for your time.

[Operator]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.