Donnelley Financial Solutions Inc

NYSE:DFIN

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Joseph and I'll be your conference operator today. At this time, I would like to welcome everyone to the Donnelley Financial Solutions Second Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. Mr. Mike Zhao, Head of Investor Relations, you may begin your conference.

[Michael Zhao, Head, IR]

Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions second quarter 2022 results conference call. This morning, we released our earnings reports, supplemental trending schedule of historical results. Copies of which can be found in the investor 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 detailed in our most recent quarterly report on Form 10-Q and other filings with the SEC.

Further, we will discuss certain non-GAAP financial information such as adjusted EBITDA and adjusted EBITDA margin. 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 am joined this morning by Dan Leib, Dave Gardella, Craig Clay, Eric Johnson, Floyd Strimling, and Kami Turner.

I will now turn the call over to Dan.

[Daniel Leib, President and CEO]

Thank you, Mike. Good morning everyone and from all of us at DFIN, we hope that you and your families are doing well. We're extremely pleased with the company's performance during the quarter, especially in light of the continuing macroeconomic headwinds, current geopolitical unrest, and related market volatility.

In this difficult operating environment, we delivered excellent second quarter results, including positive constant currency year-over-year revenue growth, record quarterly adjusted EBITDA, year-over-year adjusted EBITDA margin expansion, and increases in both operating cash flow and free cash flow.

Our second quarter performance serves as further proof that our strategic transformation is resulting in DFIN becoming fundamentally and sustainably more profitable, enabling us to deliver a much higher level of profitability compared to historical periods of similar revenue size.

I'm also pleased with the solid progress we have made against a number of the operating objectives that underpin our updated long-term plan that we communicated on our last earnings call.

First, during the second quarter, we made continuing progress in transforming DFIN into a software-centric company. Total software sales grew nearly 8% versus the second quarter of 2021 and made up 26.9% of total second quarter net sales, an increase of approximately 200 basis points from last year second quarter sales mix. As a reminder, the second quarter, largely due to the proxy season, historically represents a seasonal low for software as a percentage of revenue.

On a trailing four-quarter basis, software sales reached $285 million growing 23% from the second quarter 2021 trailing four quarters and represented 30% of total sales in that period, an increase of approximately 480 basis points from the second quarter 2021 trailing four-quarter period. This continued positive mixed shift positions as well to exceed our 44 in 2024 goals, that is deriving 44% of our sales from software by 2024 and also to deliver on our longer term sales mix target, software sales comprising 55% to 60% of overall sales by 2026.

An improved sales mix combined with operating efficiencies and the impact of structural cost reductions helped to drive solid profit and margin improvement in the quarter.

Our second quarter adjusted EBITDA margin of 31% is approximately 110 basis points above last year second quarter and brings the trailing four-quarter adjusted EBITDA margin to 29%, further providing confidence in our ability to achieve our long-term targets.

Consistent with last quarter, our second quarter adjusted EBITDA margin is once again substantially higher than historical quarters was similar overall and transactional revenue, reflective of our evolving sales mix and scale as well as continued cost discipline.

Our ability to operate at a higher level of profitability across varying points in the market cycle is a further proof point that our strategy and execution is resulting in DFIN being fundamentally and sustainably more profitable and resilient than in the past.

In the second quarter, consistent with our long-term plans, we increased investments in software development and information technology to support continued modernization, innovation, and growth. These additional investments reflected in both expense and capital expenditures will help to profitably scale our existing products and expand our software offerings.

We've used such organic investments as a high priority and will remain disciplined in our investment decisions, taking a staged investment approach to ensure projects are generating returns at or above required levels.

In addition to delivering strong financial results during the quarter, we also made significant progress in the return of capital to shareholders, an important component of our long-term value creation framework. We repurchased 2.2 million shares during the second quarter of 2022, bringing our second quarter year-to-date repurchases to 3.4 million shares. At quarter end, we had $59 million remaining on our share authorization, which we intend to fully utilize by the end of 2022.

Our solid financial results and prudent capital allocation, continue to provide us with ample financial flexibility, which is reflected in our quarter and non-GAAP net leverage of 0.8 times, 0.1 times lower than the second quarter of 2021.

Finally, we took important steps to enhance DFIN's organizational talent and leadership capabilities to support our long-term growth plans. As we transform DFIN into a software-centric company, we continue to invest to drive client engagement, improve client experience, and increase lifetime value. As a result, earlier this year, we created the role of Chief Client Experience Officer, a position that will oversee client experience for all software offerings throughout DFIN.

Jodie Sweetin, who recently joined DFIN from Salesforce, will lead this client-centric organization that will ensure our clients have an outstanding and predictable experience as they move through their lifecycle with DFIN, from implementation to support to service.

In addition, last month, we announced the appointment of Chandar Pattabhiram, the current Chief Marketing Officer of Coupa Software to our Board of Directors. As a highly regarded well rounded software executive, Chandar brings more than 20 years of B2B and enterprise marketing leadership in high growth SaaS product offerings. We look forward to partnering with Chandar as we continue to execute on our business plan to drive growth and enhance shareholder value.

As I've noted previously and reiterated today, the consistent progress against our plan is driving outstanding results. This year's market environment and our performance have demonstrated DFIN's ability to thrive in difficult market conditions and showed the strength of our recurring offerings.

These recurring offerings provide our business with stability during times of market volatility, while also allowing us to serve our clients and their evolving regulatory and compliance needs.

One key component of our recurring revenue base is our compliance and regulatory-driven software products. These recurring compliance software offerings grew 13% in aggregate, or 14%, on a constant currency basis versus the second quarter of last year and accounted for approximately 61% of total second quarter software sales.

The growth in our compliance software offerings is led by ActiveDisclosure, the newest SEC reporting solution on the market, which grew 20% in the second quarter. More importantly, subscription-based revenue for new AD grew 25% in the quarter, an important metrics that will help to accelerate our recurring revenue growth.

Since new ActiveDisclosure's introduction, we continue to make excellent progress in the market and in transitioning clients from our prior platform to new ActiveDisclosure, while also realizing higher price levels and longer term subscriptions, resulting in strong annual recurring revenue.

Arc Suite, the other component of our recurring compliance software offering, delivered solid year-over-year sales growth of 11% or 13% growth on a constant currency bases, despite last year strong second quarter, driven by regulatory change that allowed us to transition clients from a print solution to a new software offering.

I am encouraged by the solid subscription revenue growth across our ArcPro and ArcReporting solutions, helping to more than offset a normalized demand profile for our digital photo compliance management solution, which had a very strong adoption in 2021, following its introduction in response to regulatory change.

The second component of our recurring revenue comes from compliance-related offerings within both of our Compliance and Communications Management segments. These recurring revenues are based on Capital Markets, Compliance Activities and services-based compliance solutions within investment companies, two offerings not directly affected by the current volatility of the Capital Markets transactions environment and the secular decline in print and distribution.

Combined, these offerings assist our corporate and mutual fund clients to become and remain compliant with SEC regulations and are predominantly recurring in nature with very strong customer retention rates.

In the second quarter, total compliance sales reach nearly $100 million and grew 26% versus second quarter of 2021. The strong growth in the second quarter is primarily driven by an increased volume of Capital Markets regulatory and compliance filings. The robust IPO and SPAC environment of 2021, increased the number of public companies, while growing the demand for SEC compliance-related services.

We are well positioned in this space to continue to leverage our client-centric service model, operating scale, and domain expertise to further drive recurring compliance revenue. Our dual compliance platform is comprised of traditional offerings and software offerings allow us to support our clients in the way they prefer to work.

The continued growth in both recurring compliance software and compliance offerings within Capital Markets and investment companies is an important step in the transformation of our business mix and financial profiles to become more predictable and resilient, regardless of market conditions.

While our compliance solutions continued to gain traction, our transactions-based offerings, by their nature, are subject to volatility inherent in the Capital Markets deal environment.

The second quarter transactional market remain challenged with a continuation of the very soft IPO market we experienced in the first quarter and very few large M&A deals being completed. Specifically, global IPO activity was down 90% and the M&A market, while more resilient than the IPO market, was down 20% from last year second quarter.

Additionally, the SPAC market which produced a record number of SPAC registrations in 2021, remains largely on pause in the second quarter. Against the backdrop of a very challenging transactions environment, I'm encouraged by the fact our transactions based offerings perform better than the overall market.

Our Capital Markets transactional revenue declined 22% in the second quarter, which within the context of the current environment outperform the broader market. Additionally, transactional revenue in the second quarter increased sequentially from the first quarter.

Let me highlight two drivers behind our transactional revenue performance that enabled DFIN to deliver better results than the market. First, our clients are continuing to work, such as updating their filings with current financial statements remain ready for when market stability returns.

Our clients deal teams perspective as well as public commentary from investment banks, confirms that activity levels and engagement are still quite high with deals being pushed out to an undetermined time. DFIN is actively assisting several hundred clients with their transactions and our work on those transactions is continuing even in the absence of completed deals. When market volatility, geopolitical unrest, and investor confidence stabilize, a healthy pipeline of profitable companies will be ready to list.

Secondly, as the transactional market statistics are based on the total number of deals, they don't fully account for DFIN's strong position within the market for larger or more complex transactions, which generate more value for the service providers.

Our industry-leading capabilities to serve large and complex deals and our strong market share within those larger transactions helped us to deliver strong transactional revenue even in a lower deal count environment.

Similarly, our transactional software offerings Venue, perform better than its primary use case M&A. With the global M&A market down approximately 20% year-over-year in the second quarter, the level of underlying activity taking place on our Virtual Data Room platform remained resilient, enabling Venue to achieve a similar level of sales compared to the second quarter of 2021, which was up 50% from the second quarter of 2021. Excluding the impact of foreign exchange rates, Venue posted modest sales growth of 2%.

Finally, our strong second quarter results were made possible by our team of nearly 2,200 employees worldwide, who share a common purpose of serving our clients by providing superior software solutions, deep domain expertise, and best-in-class service.

Since we became an independent company nearly six years ago, the development of our people and culture had been at the forefront of our management agenda. Through continued focus benchmarking with leading companies and investments in our employees, we have made meaningful progress resulting in DFIN being a great place to work.

Internally, we are receiving positive feedback from our employees on our updated career and compensation framework, initiatives that advance diversity, equity, inclusion, and our fully flexible work environment.

Externally, we continue to be recognized for the progress we are making to transform our culture and enhance the employee experience. I am pleased that DFIN has recently achieved certification as a Most Loved Workplace, a coveted accolade promoted in Newsweek Magazine, that validates our ongoing commitment to creating an inclusive environment where employees can do their best work every day. I believe if we continue to do the right things, we will continue to be an employer of choice and deliver superior results for our clients and shareholders.

Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our second quarter results and our outlook for third quarter. Dave?

[David Gardella, CFO]

Thanks Dan and good morning, everyone. As Dan noted, we delivered very strong second quarter results in a challenging environment. The quarter featured consolidated year-over-year constant currency revenue growth, higher adjusted EBITDA, and adjusted EBIT margin, and increases in both operating cash flow and free cash flow from last year second quarter.

By continuing to focus on operating efficiencies, while also improving our sales mix, specifically more software and less print sales, we improve second quarter adjusted EBITDA margin by approximately 110 basis points compared to the second quarter of 2021.

Our second quarter results provide additional positive proof points that our strategy is working, allowing us to deliver outstanding results, while also continuing to invest in evolving to a more recurring sales mix, aggressively managing our cost structure, and being disciplined stewards of capital.

On a consolidated basis, net sales for the second quarter of 2022 were $266.2 million, a decrease of $1.3 million or 0.5% from the second quarter of 2021. The negative impact of foreign exchange rates was $2.1 million, accounting for more than all of the year-over-year sales decline. On a constant currency basis, second quarter net sales increased 0.3% versus the second quarter of 2021.

Software solutions net sales for the second quarter were $71.6 million, an increase of $5 million for 7.5%. Our recurring compliance offerings, which include active disclosure and Arc Suite delivered 13% sales growth in aggregate. ActiveDisclosure continued to demonstrate strong sales momentum, growing approximately 20% in the quarter, and Arc Suite net sales grew 11% in the quarter, driven by subscription revenue growth.

Tech-enabled services net sales were $133.3 million, a decrease of $0.7 million or 0.5% due to decreased Capital Markets transactional activity, which was almost entirely offset by higher Compliance volume within Capital Markets and growth in investment companies tech-enabled services net sales.

Print-in distribution net sales were $61.3 million, a decrease of $5.6 million, or 8.4% due to the regulatory-driven reduction in demand for print-in materials within investment companies, partially offset by price increases.

Second quarter non-GAAP gross margin was 58%, approximately 200 basis points higher than the second quarter of 2021, primarily driven by a favorable sales mix and the impact of ongoing cost control initiatives, partially offset by lower Capital Markets transactional activity,

Non-GAAP SG&A expense in the quarter was $71.8 million, a $1.8 million increase from the second quarter of 2021. The increase in non-GAAP SG&A is primarily driven by higher sales and marketing expenses, due in part to incremental expenses related to our in-person annual sales meetings, which were held virtually in 2021 as well as additional investments in product development and technology, partially offset by the impact of ongoing cost control initiatives and lower incentive compensation expense. As a percentage of net sales, non-GAAP SG&A was 27%, an increase of approximately 80 basis points from the second quarter of 2021.

Our second quarter adjusted EBITDA was $82.6 million, an increase of $2.7 million, or 3.4% from the second quarter of 2021. Our second quarter adjusted EBITDA margin was 31%, an increase of approximately 110 basis points from the second quarter of 2021, driven by growth in Capital Markets, Compliance volume and a favorable sales mix within investment companies, Compliance and Communications Management segment, the impact of cost savings initiatives, and lower incentive compensation expense, partially offset by lower Capital Markets transactional volume.

As Dan mentioned earlier, our second quarter adjusted EBITDA margin is much stronger than our historical margins in quarters with similar overall and transactional revenue.

To illustrate this in more detail, in the second quarter this year on a similar level of transactional sales and a slightly higher level of overall sales compared to the second quarters of 2019 and 2020, this year second quarter adjusted EBITDA of $82.6 million is $26.5 million and $21.8 million higher than the second quarters of 2019 and 2020 respectively.

From a margin perspective, second quarter 2022 adjusted EBITDA margin was 31% compared to 21.7% and 23.9% in the second quarters of 2019 and 2020 respectively. Our focus efforts to reduce fixed costs across the business and to variablize our cost structure in specific areas had positioned DFIN to be more sustainable and resilient throughout market cycles.

Turning now to our second quarter segment results. Net sales on our capital market software solution segment were $46.3 million, an increase of 5.7% from the second quarter of 2021. Excluding the negative impact of foreign exchange rates, net sales increased 6.8% year-over-year.

The increase in net sales is primarily due to the performance of our recurring compliance product ActiveDisclosure, which had another strong quarter posted a 20% growth and marking the sixth consecutive quarter of double-digit sales growth.

Sales of our Virtual Data Room offering, Venue, were in line with the second quarter of last year, despite a much lower level of overall transactional activity this year.

Similar to what we experienced in the first quarter, Venue continue to outpace the market trend of its primary use case, M&A during the second quarter. With M&A activity down approximately 20% on a year-over-year basis in the second quarter, we are encouraged by the resiliency of Venue sales.

Adjusted EBITDA margin for the segment was 19%, a decrease of approximately 1,000 basis points from the second quarter of 2021. The decrease in adjusted EBITDA margin was primarily due to an unfavorable sales mix, incremental product development and technology investments, higher sales and marketing expenses, and increased allocations of overhead, partially offset by higher sales, price uplift on new AD and the impact of cost controls.

As reminder, the margin structure for ActiveDisclosure contains costs associated with supporting both the AD3 and new AD platforms. We expect to materially complete the transition from AD3 to new ad by early 2023, which will eliminate the duplicative technology costs, further improving the margin profile of ActiveDisclosure and the segment as a whole.

Net sales in our Capital Markets, Compliance and Communications Management segment were $150 million, a decrease of $3.1 million for 2% from the second quarter of 2021 due to lower Capital Markets transactional activity, partially offset by higher Compliance volume.

As Dan mentioned, similar to the first quarter, the Capital Markets transaction environment remained very soft in the second quarter, which continue to weigh on IPO, SPAC, and m&, activities. While persistent macroeconomic and geopolitical headwinds remain, the fundamental drivers of deal-making are strong. We remain encouraged by the continued work our clients are undertaking, with the support from DFIN to remain prepared for transaction when market stability returns.

That robust level of underlying activity across our pipeline of several hundred in-process IPOs and a relatively resilient M&A market, including continued deSPAC transactions translate into a solid pipeline of revenue opportunities for DFIN.

While the majority of our revenue is recognized at the closing of a transaction, certain deal activities such as initial filings generate revenue while a transaction is in process and as milestones are achieved. The volume of those in-process deal activities gives us confidence that those activities will lead to substantial future revenue when the market volatility subsides.

The decline in Capital Markets transactional revenue was partially offset by the growth in Capital Markets Compliance. The second quarter Capital Markets Compliance revenue of $76 million represents a quarterly record and grew 31% year-over-year.

The strong growth in the quarter was driven by increased Compliance volume as a result of higher customer count and market share gains, as well as price increases on additional services.

Unlike the volatility inherent in the transactional activity, the vast majority of our Capital Markets Compliance offerings supports our corporate clients with their recurring SEC compliance needs.

DFIN's domain expertise, strong service culture, and ability to serve clients across their lifecycle has positioned us well to capture a significant portion of newly formed public companies and continue to expand our share.

In the second quarter, which is the peak season for Compliance filings, we saw the result of our success, supporting customers on their private to public journey and winning the follow on recurring Compliance work.

Adjusted EBITDA margin for the segment was 41.2% [ph], a decrease of approximately 220 basis points from the second quarter of 2021. The decrease in adjusted EBITDA margin was due to the lower transactional sales, partially offset by lower selling expenses and cost savings initiatives.

Net sales in our investment company software solution segment were $25.3 million, an increase of 11% from the second quarter of 2021, which was also a very strong quarter.

Excluding the negative impact of foreign exchange rates, net sales increased 12.8% versus the second quarter of 2021. The year-over-year growth was driven primarily by subscription revenue growth in ArcPro and ArcReporting, two products within our Arc Suite offering,

As expected, the demand for our digital, our total Compliance Management offering, which was a big driver of the net sales growth for this segment in 2021 following the initial adoption, was more normalized in the second quarter. Going forward, we expect the normalized growth profile for our digital to continue.

Adjusted EBITDA margin for the segment was 34%, an increase of approximately 460 basis points from the second quarter of 2021. The increase in adjusted EBITDA margin was primarily due to operating leverage on the increase in sales, partially offset by higher product development and technology investments.

Net sales in our investment companies Compliance and Communications Management segment were $44.6 million, a decrease of $3.2 million or 6.7% from the second quarter of 2021 due to the impact of regulatory changes and a reduction of print sales related to contracts we proactively exited.

Adjusted EBITDA margin for the segment was 32.7%, approximately 2,180 basis points higher than the second quarter of 2021. The increase in adjusted EBITDA margin was primarily due to a favorable sales mix, featuring more services and less print, price increases on the remaining print work, and a reduction in overall expenses within the segment, including lower incentive compensation expense and reduced overhead costs based on the lower activity level in this segment.

As we noted previously, we have successfully shifted 100% of our offset print production needs to our third-party vendor network, breeding a fully variablize cost structure. Going forward, we will continue to operate a digital-only print platform to meet the demand for higher value quick turn requirements.

Regarding the regulatory change that will continue to reduce this year's demand for print in this segment, we expected decline in net sales of approximately $30 million and only a de minimis impact on adjusted EBITDA in 2022. The majority of this year's regulatory-driven decline in print is reflected in our year-to-date results.

Non-GAAP unallocated corporate expenses were $11.2 million in the quarter, flat to the second quarter of last year as increase in expenses aimed toward accelerating our transformation were offset by the impact of ongoing cost control initiatives and lower incentive compensation expense.

Free cash flow in the quarter was $30.9 million, representing an improvement of $10 million from the second quarter of 2021. The improvement in free cash flow reflects the year-over-year benefit of last year's payment of $15.7 million related to the LSC multi-employer pension plan obligation, partially offset by additional capital expenditures in technology development during the second quarter of 2022 as Dan mentioned,

As of June 30th, 2022, our non-GAAP net leverage ratio was 0.8 times, down 0.1 times from the second quarter last year. As a reminder, our cash flow is historically seasonal. We are a user of cash in the first quarter, closer to breakeven in the second quarter, 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 this seasonality to continue to become less significant.

Regarding capital deployment, we repurchased approximately 2.2 million shares of common stock during the second quarter for $64.4 million at an average price of $29.54 per share.

As of June 30th, 2022, we had $58.6 million remaining on our $150 million stock repurchase authorization. We expect to utilize the remaining stock repurchase authorization in 2022 as part of our broader capital allocation strategy that also includes additional investment in technology development. As always, we will maintain our discipline approach on all capital deployment decisions.

As it relates to our outlook for the third quarter of 2022, we expect continued market volatility driven by aggressive Fed action to combat inflation, ongoing supply chain issues, and geopolitical uncertainties, which will continue to weigh on the Capital Markets transactional environment.

So, far in the third quarter, priced IPOs and SPACs remain well below this point last year. Large M&A deal completions are also below last year's level and as Dan and I both noted earlier, we are encouraged not only by what we hear from the investment banking community regarding ongoing transactional activity, but also by the continued work our clients are undertaking to remain prepared for a transaction when the market stability returns.

In addition, we expect sales from print-in distribution to continue to decline, but with a minimal impact through adjusted EBITDA. We remain bullish on the near-term outlook for our software solution sales and expect continued strength in the growth trajectory of our recurring compliance software offerings.

With that as the backdrop, we expect consolidated third quarter net sales to be in the range of $200 million to $220 million and an adjusted EBITDA margin percentage in the mid-20s. And once again, much stronger than historical quarters of life size total and transactional sales.

Our third quarter guidance contemplates similar dynamics as the first and second quarters of this year with continued software growth, reductions in print-in distribution net sales, and a significant year-over-year reduction in transactional revenue.

As referenced transactional revenue in last year's third quarter was the highest level it had been in over the previous five years, and grew nearly 50% from the year before. Based on our market leadership, DFIN is very well-positioned to capture a significant share of future demand for transactional-related products and services.

More importantly, our growing software offerings, when combined with our expertise and scale in technology-enabled services enable us to offer our clients an unmatched portfolio of end-to-end regulatory and compliance solutions.

With that, I'll now pass it back to Dan.

[Daniel Leib, President and CEO]

Thanks Dave. Our performance in the second quarter of 2022 provides us with strong momentum to continue to execute DFIN's strategic transformation. While the macroeconomic outlook remains uncertain, the combination of our market position, cost structure, and strong balance sheet positions as well heading into the back half of the year.

Before we open it up for Q&A, I'd like to thank the DFIN employees around the world who have been working tirelessly to ensure our clients continue to receive the highest quality solutions. Stay safe and healthy.

With that, operator, we're ready for questions.

[Operator]

[Operator Instructions]

Your first question comes from the line of Charles Strauzer. Your line is open.

[Charles Strauzer, CJS Securities, Inc.]

Hi good morning.

[Daniel Leib, President and CEO]

Good morning Charlie.

[Charles Strauzer, CJS Securities, Inc.]

If we can talk a little bit about the compliance-related sales, you had really outstanding growth there year-over-year. Maybe drill down on the give us a little bit more colors to what drove that with a lot of kind of one time work? Or is this -- do you think it's more sustainable than you had first thought? And if it is more sustainable, it would appear that Q3 guidance may be a tad conservative. Can you comment on that?

[David Gardella, CFO]

Yes, Charlie, it's Dave, I'll comment on it. So the, -- as you pointed out the traditional compliance offerings saw really nice growth. I noted in the prepared remarks that was really driven by higher customer counts, market share gains and some price increases around the additional services that we provide there.

I think when you look at Q2, it's the highest quarter for compliance in both of the segments, driven by proxy and all the work that goes around there. I think specific to Q3 guidance, the year-over-year -- really tough comp more on the transactional side last year, and -- again, I mentioned this last year, we did $114 million of transactional in Q3.

I think as we look at what we've done so far in the first two quarters this year, just over $50 million in Q1 transactional revenue, about $74 million this quarter, we're assuming somewhere similar to the Q2 level. And that's really what brings that Q3 guidance to where it is just the tougher year-over-year comp, and the fact that transactional revenue -- sorry, that compliance revenue that you noted, those are sustainable and ongoing recurring. But again, that level is elevated in Q2 driven by proxy.

[Craig Clay, President, Global Capital Markets]

This is Craig. We're at the center of our clients regulatory compliance and governance needs and I think the CNCM compliance results in the quarter demonstrate that. And as you heard from Dan, we're supporting clients in any way that they want to work. And really, our domain expertise, our relationships in the capital market are driving this recurring revenue.

Our clients are viewing us as an extension of their team. So, whether that's in proxy or human capital disclosure, or the VSU [ph] mandate, as reviewed on the call, compliance up 31%, as Dave said, it's driven primarily by 10-K, and 10-Q volume.

So, share gains and 10-K, 27% is a result of public company growth and SPAC, who are utilizing our traditional platform for our customer count is up 11% for 10-K. For proxies, it's up 27%. So, just a really nice performance there.

In the [indiscernible] from 2021, so with a win, the number of public companies working here has increased, the retention on that business is high. So, it's going to be stable. It's going to be less year-over-year growth in 2023 given the current IPO market, but we're increasing our share of SEC compliance filings after many years of declines. We're going to keep executing on our plan in 2022 and beyond. We're in a really great competitive position, as we're focused on how performing regardless of the market.

[Charles Strauzer, CJS Securities, Inc.]

That's very helpful.

[Eric Johnson, President, Global Investment Companies]

And Charlie, I would just add, this is Eric Johnson. I would just add from the investment companies perspective, what we're seeing is our clients really rely on the GIC team to help them manage their complaints process on a monthly -- weekly basis. So, what we're seeing is, the driver of revenue for us is our tech-enabled solutions, as well as our services teams. As our teams manage the creation through the filing as well as the web posting and e-delivery of this compliance work. So, that's been a big driver for us.

[Charles Strauzer, CJS Securities, Inc.]

Excellent. Thanks for all that color. That's really helpful. And shifting a little bit to the Capital Market software side, growth was about 5% year-over-year, but lower sequentially. Can you maybe expand a little bit more on that?

[Daniel Leib, President and CEO]

Yes. So, I'll kick off and then -- excuse me, it's Dan, if anyone wants to jump in. But if you disaggregate that, the -- it's really the mix impact of Venue whose primary use case is M&A. So, Venue grew or was flat grew about 2% on a constant currency basis. And then what was extremely positive and continues to be was the performance in our compliance software within Capital Markets.

So, the new ActiveDisclosure subscriptions grew 25% year-over-year, so really happy about the reception that that's receiving in the market. And then also as we're converting clients over, as I mentioned in my comments, we're seeing good price uplift and better longer term on the contracts.

[Charles Strauzer, CJS Securities, Inc.]

Great. Thank you very much. I'll jump back in queue.

[Daniel Leib, President and CEO]

Thank you, Charlie.

[Operator]

Your next question comes from Pete Heckmann. Your line is open.

[Pete Heckmann, D.A. Davidson]

Good morning, everyone. And really nice to…

[Daniel Leib, President and CEO]

Good morning, Pete.

[Pete Heckmann, D.A. Davidson]

…follow on to Charlie's question and just try and dig in a little bit more on that the upside, or the offset and compliance revenue, you're really pretty big number 76 million, certainly bigger than any quarter we've seen in the last three years. And I just want to -- it sounds as if you're doing perhaps more services around annual meetings or proxies? And is that correct? Would it be more tech-enabled services, print or software? And then would you given your guidance for the third quarter doesn't show repeat of that? Is that largely going to be seasonal revenue confined to the second quarter?

[David Gardella, CFO]

I'm sure, I can lead off. So thanks for question. It is primarily seasonal, because you have a mix of the K proxy, then you have one Q peak, the May, in essence May timeframe, a few. So there is some seasonality baked on them, and then you're correct. We're providing software, which will show up obviously, in the new ID numbers that Dan just recalled, as well as managed solutions, which I'm going to side around a conditional platform. It's around our proxy or creative services, it's around ESG.

It's around the reports that we're providing for our clients from an ESG perspective, really excited by the fact sheet that we're producing, so all of that's rolling into this traditional compliance role. It is based on us retaining our clients from the prior IPOs back market, moving that into 2022, delivering increased client count, increased share, again, a higher retention rate.

So as you look at the forward quarters, that retention is going to be primarily accused until you get to 2023. When we accept -- expect to retain it, certainly the growth of IPOs is going to suppress the growth yet again in 2023.

[Pete Heckmann, D.A. Davidson]

Okay. And then within investment company, it doesn't appear entirely material, I guess, but a modest uptick in transactional revenue. Would that reflect some like fund proxy projects on the print side?

[Eric Johnson, President, Global Investment Companies]

Yes. Hey, Pete, this is Eric Johnson. And thanks for the question. Yes, that certainly proxy activity, as well as transactional work like closed end funds that are transactional in nature. So we had a nice mix in the quarter.

[Pete Heckmann, D.A. Davidson]

Okay. Great. I'll get back to the queue. Appreciate it.

[Eric Johnson, President, Global Investment Companies]

You bet, Pete.

[Operator]

[Operator Instructions] Your next question comes from Charles Strauzer.

[Charles Strauzer, CJS Securities, Inc.]

Hi. Yes. Another couple follow-ups here. Looking at the EBITDA margins, obviously, were meaningfully better than your guidance for Q2. And again, close to what margins should look like in the back half of the year, if you need some of the mix kind of really

more favorable than just perhaps the mid 20 that you're guiding to?

[David Gardella, CFO]

Yes, Charlie. So I think, certainly for Q2, a lot of that relative to our guidance was driven by a little bit better transactional revenue than our guidance implied. So you see that both on the revenue line, as well as the margin line there. And also, as you know Q2 is typically our seasonal largest quarter. So we get the operating leverage there. And when you look at the mid 20 margin, relative to what we did in Q1, on similar size revenue, I think we delivered 24% margin in Q1. And so when you take away the impact of the operating leverage on a similar sales mix, we think mid-20s is a pretty reasonable estimate.

[Charles Strauzer, CJS Securities, Inc.]

Yes. It makes sense. Thank you. And then just the lastly, just any concern over the underperformance of companies that have siege SPAC recently, some of the pressures on some of these companies once they start trading under the new banner, so to speak, seems to be weighing heavily on the SPAC market for just not only monitoring these guys, but also finding combinations and getting them consummated?

[Craig Clay, President, Global Capital Markets]

Sure. This is Craig Clay. I'll take that. In SPAC IPOs have historically made up a small percentage of our transactional revenue for the bigger opportunity for us has been the SPAC. And in honestly, in 2022, they've held up better given the year-over-year comparison. It's also an opportunity for DFIN because in the De-SPAC, many that had been announced. And there's over 100, that had been announced. Many few that have completed, fewer have completed, but there tend to be the larger De-SPAC which trends towards DFIN.

As you heard in the prepared remarks, our kind of sweet spot are these larger deal, the larger, more complicated working groups that have been on these De-SPAC have meant that we've really been able to increase our share in this space, even year-over-year, based on the mix of deals that's within that. So very correct, De-SPAC the initial filings almost de minimis 600 SPAC looking for a target. There still is an opportunity with that population, as well as the 100 that had been announced. We're certainly closely monitoring the SEC SPAC attention.

We support transparency. And we think it is significant to formalize with its house SPAC play in the capital market. And it's going to continue to be an opportunity for DFIN, as we support our clients, we think the SPAC formations will reset to a less manic pace. But certainly be above the long-term average, which prior to 2020 that weren't a lot of -- I mean all of either are software platforms. So it's just a nice ecosystem.

[Charles Strauzer, CJS Securities, Inc.]

Great. Thank you for that.

[Operator]

Thank you. Your next question comes from Raj Sharma. And your line is open.

[Raj Sharma, B. Riley Securities]

Thank you guys at an excellent quarter. I wanted to understand, so what seems to have caused the significant outperformance in Q2 is the transactions have done better? The transactional business has done better than the overall industry and wanted to understand that what caused that beat?

Also, the other big reason is better than expected compliance related that you seem to be gaining share in, do you not expect that to continue in Q3 and Q4 the share gain impact, because the guidance seems very conservative relative to the outperformance you've seen in Q2?

[Daniel Leib, President and CEO]

Yes, Thank you, Raj. So a couple things on your the first question on transaction. So it's a couple of things, the overall market as in some of the stats that we quoted are our unit based. And so we do see clients continuing to do work, as – and even though deals aren't closing, we're still getting compensated recognizing some revenue for that work.

And importantly, as I mentioned, those statistics are unit based, we find ourselves very well positioned as we've always been. And then we've been we were very successful in winning the more complex in the larger deals. And so those for measuring share on units and then seeing the flow through coming dollars. So we saw some pick up there.

On the compliance side, last year is exceptionally strong IPO market. And yes, IPO market, I was going to say, SPAC market did lead to additional compliance ongoing work for us and we saw that come through in Q1, we saw that come through in Q2 and we expect that going forward. In addition, in the second quarter, we do benefit from the proxy season, which is a seasonal activity. And we had some really good performance there as well.

I think in terms of guidance and how that flows through, I don't know, Dave, if you want to add anything to your prior comments.

[David Gardella, CFO]

Yes. So, when you look at that Q3, again, the midpoint of our guidance, for transactional, assume something similar to the call it mid 70 million numbers that we recorded in Q2. But again, that year-over-year comparison is extremely tough. Last year, third quarter, transactional revenue was 114 million. And again, that was the highest quarter that we've seen for transactional in a quarter in the last five years. I think probably on margin, the most relevant point here we get, and we noted this on the first quarter call and reiterated it today. And that said, our margin profile is much, much stronger than the historical margins, we were delivering in quarters with similar overall and transactional revenue.

Raj, I went through some of the comparisons in the prepared remarks. I think the takeaway there is, is that the company is fundamentally more profitable, regardless of the transactional environment. Now, we'll certainly see the impact of changes in the transactional market. But I think when you think about the underlying baseline profitability, it's really substantially higher than it was just a couple of years ago. And again, that's due to the changing sales mix, more software, less print, as well as the actions that we've taken on to permanently reduce the cost structure and all that getting reflected in the results.

[Raj Sharma, B. Riley Securities]

Right. Thanks for that. But the Q3 guidance still seemed very conservative given where you see, transactions is flat to second quarter, and then compliance, do you not do, I mean, there's a seasonality impact from Q2, and compliance and 10-K that you won't see, but you do not see the market share gains coming through in Q3, and Q4 as well?

[David Gardella, CFO]

No, those gains will come through, I think, when you look at the -- to your point, the seasonality aspect of compliance, and you can take a look, last year, as an example, compliance last year went from $48 million in Q1 to $58 million in Q2, down to $28 million in Q3, and $21 million in Q4. So again, you know, Q1 with 10k, Q2 with some K, obviously, all the quarters had a Q, but that proxy volume, so the seasonality in compliance is just much, much lighter in the back half of the year than it is in the front half of the year.

[Raj Sharma, B. Riley Securities]

Got it. Got it. Thanks. And then another last question is on the print --

[David Gardella, CFO]

Raj, sorry, just one more thing, and, we have in our -- on the investor site, on the website, a trending schedule that goes back quarterly to 2019. And so, I think it'd be helpful, you can see, really how that seasonality plays out. It's pretty consistent in each of the last three years.

[Raj Sharma, B. Riley Securities]

Great. Got it. And then the print side, are most of the cuts been taken? I think you indicated, there also seems to be better than expected performance on the print side, in Q2, or -- ?

[David Gardella, CFO]

Yes. So no, no, it's a great point. So on the first, the first part, the answer is yes, more than more than half of the print and impact has been reflected in our year-to-date results. We think, there's a little bit that happens in the back half of the year. But, generally absorbed, on the second point around print being a little bit better than our initial guidance on, the combination of the regulatory impact as well as, some of the contract pruning that we were doing, we changed that estimate for this year. We initially set about a $40 million revenue impact. And, essentially no EBITDA impact, we've taken that down to about a $30 million impact.

And from a revenue perspective, and actually from an EBITDA could actually be helpful. And the reason for that change is that a lot of the contracts that we thought we were exiting, through price increase, and we thought that we would likely lose, we've actually retained more of that work at substantially higher prices, at a margin that's now acceptable on that work. And therefore, the total impact of print from a revenue perspective is less, and we actually get, pretty reasonable market on it now.

[Raj Sharma, B. Riley Securities]

Great. Thank you. I'll take my questions offline. Thank you. Congratulations, again.

[David Gardella, CFO]

Thank you, Raj.

[Daniel Leib, President and CEO]

Thanks, Raj.

[Operator]

Your next question comes from Pete Heckmann. Your line is open.

[Pete Heckmann, D.A. Davidson]

Hey, just two quick follow-up. So just to be clear on, on capital markets, transactional revenue, certainly, that outperformed our expectations, given that some of the activity we saw, but is it fair to say the two areas that outperformed or at least get better would be M&A overall, including with venue and then defect mergers?

[Daniel Leib, President and CEO]

Yes. Pete, so we would agree, I think even relative to the guidance, we had assumed lower transactional revenue. And again, as we noted, you know, the overall M&A including De-SPAC was much more -- or much less impacted on a year-over-year basis than then IPO activity.

[Pete Heckmann, D.A. Davidson]

Okay. Okay. I just wanted to make sure there wasn't, some unusual pickup in some other item there. And then my second question is just that, I get the building number of public companies is good for DFIN, plus, the fact that you've been involved in so many IPOs of those new public companies is good for DFIN. But just looking at the share of IPOs, in the first half that was down, fairly materially from the normal run rate of like 35% to 40% of IPOs retaining DFIN, does that primarily just because most of the ideas in the first half were either pretty small, or are just the increased mix to SPAC versus the traditional IPOs?

[Craig Clay, President, Global Capital Markets]

Yes, correct. This is Craig Clay. So Q2, slowest IPO quarter since 2009, and most of what you saw what you just referenced, micro caps accounted for the majority of all IPOs in the quarter, there were only six IPOs, that raised more than 100 million. The largest was Bausch + Lomb, 77% of the IPOs in Q2, under 36 million and 43% of these were foreign issuers. So in other markets, those would be a fundraise. That's not where we play and that really down market in the first half of the year, there have been 11 IPOs, greater than 100 million, and we have completed eight of them.

So we're really pleased with our share. I think when you look underneath the work that's happening, Dave and Dan both mentioned the IPOs that are active. The companies that have publicly announced their intent to price in Q3, which include Claire's, tend to care, Specialty Building Products, and Steinway, others that have announced their intent to price this year Instacart read it and click. I look underneath that. And I think we're doing really well within the several 100 that continue to work.

So absolutely our share looks like, it's taken a hit, but it's really the market within that. And I think what we see and hear from our clients is some optimism and history has shown and demonstrated that the change in the capital market can happen really quickly. We've seen it on the downside right now. We're waiting for that to normalize. And we're hopeful that IPO window open soon.

[Pete Heckmann, D.A. Davidson]

Great. All right. That's great color. I appreciate it, Craig.

[Craig Clay, President, Global Capital Markets]

You're welcome.

[Operator]

There are no further questions at this time. Mr. Dan Leib, I turn the call back over to you.

[Daniel Leib, President and CEO]

Thank you, Joseph. And thanks everyone for joining us today. We appreciate the interest and the ongoing support and we will look forward to our next earnings call in November. Thank you.

[Operator]

This concludes today’s conference call. You may now disconnect.