Donnelley Financial Solutions Inc
NYSE:DFIN
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Donnelley Financial Solutions Inc
Earnings Call Analysis
Q4-2023 Analysis
Donnelley Financial Solutions Inc
The company saw a robust ending to 2023, demonstrating a reinvigoration of sales growth accompanied by year-over-year growth in adjusted EBITDA and steady EBITDA margin performance. This robust showing was marked by a 5.4% organic growth in consolidated net sales, with particular strength stemming from the Venue data room product which enjoyed a remarkable 26% growth. The overall solid financial health was reflected by an adjusted EBITDA increase of 5.1% and a constant adjusted EBITDA margin of 23.4%. Importantly, these results were achieved despite certain challenges, such as a 9% drop in event-driven revenue.
Software Solutions net sales hit a new high at roughly $293 million, a 7% increase from the previous year, significantly influenced by the Venue data room offering's double-digit growth. Venue, now the largest software product at nearly $110 million in revenue, leveraged broader applications within the deal ecosystem to exceed market trends in M&A. With these software solutions making up about 37% of the annual net sales, the company saw a substantial uptick from previous years. This segment's strength is credited to the introduction of new products, strategic investments in the market, and an expanding partner ecosystem. Looking ahead, the Tailored Shareholder Reports, anticipated to roll out fully in 2025, are set to contribute approximately $20 to $25 million in annual revenue.
The company is strategically aiming to extend its reach beyond core SEC compliance offerings into adjacent markets, utilizing its competencies in document management, composition, tagging, and filing to explore new use cases. This move is expected to enlarge the serviceable market significantly and lead to scalable revenue growth and market expansion.
Significant housekeeping moves included the divestiture of eBrevia and the introduction of a new $150 million share repurchase program. The company continues to balance capital deployment, prioritizing organic investments to fuel growth and net debt reduction. The improved adjusted gross margin exhibits cautious cost management and consistent strategic investment, alluding to an ongoing transformation focused on increasing predictability and resilience.
The fourth quarter showed an 8.2% organic growth in Software Solutions net sales, driven largely by Venue's impressive performance. As the software suite evolves into a more recurrent revenue mix, the company maintains strict cost structure management. The period saw a total net sales increase to $176.5 million, a 5.2% uptick from the prior year's comparable quarter. Adjusted EBITDA for the quarter was $41.3 million, with a consistent margin year-over-year. Negative performance in Capital Markets Compliance and Communications Management, which saw a 6.9% slump, was offset by solid sales increase in other areas. ActiveDisclosure's integration of the Section 16 filing capabilities and transition to a subscription model are expected to bolster its growth in the latter half of 2024.
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Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Donnelley Financial Solutions Fourth Quarter and Full Year 2023 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mike Zhao, Head of Investor Relations. Please go ahead.
Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions' Fourth Quarter and Full Year 2023 Results Conference Call. This morning, we released our earnings report, supplemental trending schedules of historical results and the latest investor presentation, which includes our updated long-term projections, all of which can be found in the Investors section of our website at dfinsolutions.com.
During this call, we'll refer to forward-looking statements that are subject to risks and uncertainties. For a complete discussion, please refer to the cautionary statements included in our earnings release and further detailed in our most recent annual report on Form 10-K and other filings with the SEC. Further, we will discuss certain non-GAAP financial information such as adjusted EBITDA, adjusted EBITDA margin and organic net sales. 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.
Thank you, Mike, and good morning, everyone. We finished 2023 by delivering strong fourth quarter results, highlighted by 5.4% organic consolidated net sales growth, year-over-year growth in adjusted EBITDA and strong adjusted EBITDA margin performance. I am encouraged by the reacceleration of sales growth in the fourth quarter despite the continued headwind in our event-driven capital markets transactional offering.
I am also pleased by the performance of our Venue data room product, which delivered net sales growth of approximately 26% in the quarter. As a result of focused execution, we grew consolidated adjusted EBITDA by $2 million or 5.1% year-over-year and delivered an adjusted EBITDA margin of 23.4% in the quarter, in line with last year's fourth quarter despite 9% lower event-driven revenue within capital markets.
Our fourth quarter results continue to demonstrate the resiliency of our operating model. Reflecting on the full year 2023 results, given the persistent market volatility, macroeconomic headwinds and geopolitical uncertainty, we delivered strong full year results. Following significant declines in capital markets event-driven revenue in 2022, the market remained very weak throughout 2023, resulting in a further revenue reduction of approximately $52 million or 22% year-over-year. Our total event-driven revenue, which also includes investment companies transactions, was down
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or 18% year-over-year. Despite this headwind, in 2023, we delivered $207.4 million of adjusted EBITDA, resulting in an adjusted EBITDA margin of 26%, both of which continue to be significantly higher than historical periods with similar overall and transactional revenues.
Our long-term focused execution to improve our sales mix and both manage and variabilize our cost structure have resulted in DFIN becoming structurally more profitable across varying market conditions, creating the financial flexibility to invest aggressively in our transformation while also repurchasing shares and reducing debt. In 2023, we made continued progress in increasing the consistency and stability of our performance. Specifically, we grew the stable and recurring parts of our business, while the volatile event-driven parts of our business declined.
To illustrate this in more detail, during the year, our recurring and reoccurring revenue, comprised of compliance-related software and services as well as our Venue data room product, increased by 2.4% from 2022 on an organic basis, while our total event-driven revenue declined by approximately 18%. In 2023, we derived approximately 75% of our total revenue from recurring and reoccurring offerings, with the remaining 25% of revenue being event-driven. We expect the evolution of our revenue profile towards a higher mix of predictable revenue to continue going forward as we accelerate the growth in our recurring and reoccurring offerings while benefiting but being less dependent on event-driven revenues.
A key component of our recurring and reoccurring revenue is our Software Solutions portfolio. For the full year, we achieved record Software Solutions net sales of approximately $293 million, an increase of approximately 7% from 2022 on an organic basis, driven by double-digit growth in our Venue data room offering, which has become our largest software product with nearly $110 million in revenue. In addition to its strong growth, Venue also exhibited a consistent level of performance in 2023 and significantly outperformed the market trend for its primary use case, M&A, owing to Venue's broader application within the deal ecosystem that creates more resilient, stable demand.
In 2023, Software Solutions net sales represented approximately 37% of our full year net sales, up from approximately 34% in 2022. Through new product introductions such as new AD and total compliance management, increased go-to-market investments and expansion of our partner ecosystem, we have more than doubled our Software Solutions revenue since our spin in 2016 to nearly $300 million in 2023, which translates into an annualized growth rate of approximately 13% on an organic basis.
Our past investments position us well to capture opportunities from current and future regulations. Given the rapid pace of regulatory change, our clients depend on DFIN's technology, domain expertise and service capabilities to guide them through an increasingly complex regulatory and compliance environment. In 2023, we developed solutions to assist our clients to comply with new SEC regulations such as the Pay Versus Performance Disclosure and are also near complete on the development and readiness for the Tailored Shareholder Reports rule, which becomes effective in July 2024. DFIN was first to market with an alpha release of our Tailored Shareholder Report software solution in October of last year. Since then, we've been working diligently on product enhancements to enable clients to complete TSR workflows at scale. With tailored shareholder reports being a financial report, DFIN is ideally positioned to leverage our ArcReporting offering, the leading financial close solution for investment companies, and our deep expertise in the areas of iXBRL tagging and compliance filing to create an end-to-end compliance solution for tailored shareholder reports.
Importantly, our ArcReporting product offers clients the ability to execute financial calculations, report creation at the fund and share class level, iXBRL tagging, reviewing and filing, all through a single solution. Further, integrated data flow within ArcReporting eliminates the need for postproduction reconciliation and guarantees consistency with the fund's financial results at the share class level. Coupled with DFIN's service expertise and production capabilities, we have created an integrated compliance solution that eliminate handoffs. We expect Tailored Shareholder Reports will generate approximately $20 million to $25 million in revenue for the full year 2025, with approximately a half year impact expected in 2024. Given our integrated approach, Tailored Shareholder Reports will benefit each of our offerings: Software Solutions, Tech-enabled Services and Distribution. We expect Software Solutions to account for nearly half of total Tailored Shareholder Reports revenue.
Before turning things over to Dave, let me provide some additional perspective on our updated long-term projections. Our focused strategic transformation over the past several years has enabled DFIN to become more profitable and resilient. With the solid foundation created, we are well positioned to continue to deliver increasing value to our 3 stakeholders: our clients, our employees and our shareholders. Currently, we're in the final stages of Chapter 2, or the fundamental transformation chapter of our journey as an independent company, a phase that started in 2020 and has approximately 18 months remaining.
Specifically, by the completion of Chapter 2, we will have transformed all areas of the company, simplifying and improving our business processes, installing more robust tooling across the organization and completing development of our single compliance SaaS platform, all aimed at creating a significantly improved and predictable experience for our clients, employees and shareholders. While there is still work remaining in Chapter 2, within our projection period, we will move into Chapter 3 of our transformational journey.
In Chapter 3, we will continue to realize benefits from our revenue mix shift and historical investments that have resulted in a strong foundation for continued innovation and growth. These dynamics result in sustained profitable revenue growth. We look forward to increasing value creation by delivering predictable, consistent organic top line growth, continued strong profitability and robust cash flow generation over the next 5 years.
Let me highlight some of the growth drivers in our long-term plan. First, deepen strong market position in regulatory and compliance, support the strategy of share of wallet expansion within our existing client base. We believe our industry-leading technology and service capabilities, coupled with our deep domain expertise, provide unique value to our clients and provide DFIN with an advantaged position across the competitive landscape. New regulations are a tailwind in our plan. Our long-term projections include opportunities from known SEC regulations, such as tailored shareholder reports. Given the rate of regulatory change, we expect our revenue will likely benefit from new regulations yet to be enacted. Those undefined future regulations will be upside to our projections. And given the typical proposal to adoption cycle, would positively impact 2027 and 2028.
Finally, we are developing capabilities to expand beyond our current core SEC compliance offerings into adjacent markets and use cases. By leveraging DFIN's foundational capabilities in the areas of document management, composition, tagging and filing, we have the ability to expand into new use cases that call upon the same set of capabilities we already possess, but which we do not serve today. In doing so, we have significant opportunities to increase the size of our serviceable market while staying close to our core competencies, allowing us to serve those new use cases productively. We expect non-SEC-related opportunities will benefit us later in our projection period.
Our single compliance platform will serve as the foundational component of our future technology ecosystem and will allow scalable revenue growth and market expansion. Our recent development efforts, which have resulted in the brand-new build of ActiveDisclosure and the newly launched Tailored Shareholder Report software solution, demonstrate the capabilities we are adding to the platform and the potential to address new market opportunities.
As I've said before, DFIN's opportunities ahead are greater than what we have accomplished thus far. Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our fourth quarter financial results, outlook for the first quarter of 2024 and our updated long-term projections. Dave?
Thank you, Dan, and good morning, everyone. Before I discuss our fourth quarter financial performance, I'd like to recap a few housekeeping items in the quarter. First, during the fourth quarter, we completed the sale of eBrevia, a software solution primarily used in contract analytics, which we acquired in 2018 and had net sales of approximately $3.8 million in 2023. As part of our technology development, over the last several years, we have gradually integrated eBrevia's artificial intelligence and machine learning capabilities into our existing offerings, including client implementations. Going forward, eBrevia as a stand-alone offering had limited value to DFIN, and as such, we sold the business. We received de minimis proceeds from the sale, resulting in a pretax loss of $6.1 million, which is recorded within the Capital Markets Software Solutions operating segment.
Second, during the fourth quarter, the Board of Directors authorized a new share repurchase program of up to $150 million with an expiration date of December 31, 2025. This repurchase authorization, which commenced on January 1, 2024, replaced the prior authorization, which expired on December 31, 2023. We continue to view share repurchases as an important component to drive value for shareholders and as part of our balanced capital deployment plan, which also features organic investments to drive future growth and net debt reduction.
Finally, as part of our ongoing effort to enhance ActiveDisclosure's functionality, our Section 16 filing capabilities which were previously reported in the standalone File 16 offering have been integrated into ActiveDisclosure. File 16 is a software solution used in the filing of beneficial ownership information mandated under SEC Section 16 and had full year 2023 revenue of approximately $9.4 million. We have updated the reporting of product level revenue details to reflect this change. Given File 16 has been historically comprised of both a subscription and a transactionally driven component, as we transition File-16 to a subscription-based model to align with ActiveDisclosure's revenue model, we expect churn to be temporarily elevated as a result of this transition, which will be more than offset by the benefits associated with a subscription-based offering, including long-term predictability.
Now turning to our fourth quarter results. As Dan noted, we delivered solid results in a challenging environment, including consolidated year-over-year net sales growth, higher adjusted EBITDA and an increase in operating cash flow from last year's fourth quarter. We posted 8.2% organic growth in our Software Solutions net sales, led by record quarterly net sales in Venue, all while 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, total net sales for the fourth quarter of 2023 were $176.5 million, an increase of $8.8 million or 5.2% on a reported basis and 5.4% on an organic basis from the fourth quarter of 2022. The increase in consolidated net sales was driven by higher Investment Companies Compliance and Communications Management segment net sales, primarily as a result of higher mutual fund special proxy activity in the quarter as well as growth in total Software Solutions net sales, which combined to more than offset a modest year-over-year decline in event-driven capital markets transactional revenue and the impact of the eBrevia and EdgarOnline dispositions.
Fourth quarter adjusted non-GAAP gross margin was 59.8%, approximately 470 basis points higher than the fourth quarter of 2022, primarily driven by growth in Software Solutions net sales and the impact of cost control initiatives, partially offset by incremental investments to accelerate our transformation and lower capital markets transactional activities. Adjusted non-GAAP SG&A expense in the quarter was $64.2 million, an $11 million increase from the fourth quarter of 2022. As a percentage of net sales, adjusted non-GAAP SG&A was 36.4%, an increase of approximately 470 basis points from the fourth quarter of 2022. The increase in adjusted non-GAAP SG&A was primarily driven by an increase in selling expenses as a result of higher sales volumes, higher incentive compensation expense relative to last year's fourth quarter, though full year incentive compensation expense remained flat to last year, and incremental transformation-related investments, partially offset by the impact of cost control initiatives.
Our fourth quarter adjusted EBITDA was $41.3 million, an increase of $2 million or 5.1% from the fourth quarter of 2022. Fourth quarter adjusted EBITDA margin was 23.4%, flat compared to the fourth quarter of 2022 as higher investment companies transactional and software solutions net sales volume and the impact of cost control initiatives were offset by lower capital markets transactional net sales and incremental investments to accelerate the company's transformation.
Turning now to our fourth quarter segment results. Net sales in our Capital Markets Software Solutions segment were $48 million, an increase of 12.4% on an organic basis from the fourth quarter of last year, driven by the strong growth in our virtual data room offering, Venue, which was up $6.3 million or 26% year-over-year and achieved record quarterly sales. Venue's outstanding performance in the quarter was driven by a higher room count, an increase in volume within existing rooms and higher pricing. On a full year basis, Venue delivered approximately $110 million in net sales and grew nearly 11% versus full year 2022 and is a main contributor to the growth of our recurring and reoccurring offerings in 2023. Venue's performance has been consistent, primarily as a result of stable demand from both announced and unannounced deals, as well as across public and private companies alike, despite some volatility inherent in the broader M&A market in terms of completed deals.
Net sales of our recurring compliance product, ActiveDisclosure, including File 16, declined approximately 2% in the fourth quarter, driven primarily by lower Section 16 filing activity, which was down nearly 16%. In the quarter, we experienced lower demand for beneficial ownership filings as a result of a weak IPO market as well as elevated churn as we transition clients to a subscription-based model. In addition, following the decommissioning of the legacy AD3 platform, we had fewer clients on the new AD platform as a result of the expected elevated customer churn rate during the transition. A lower customer count, in conjunction with the impact of SPAC liquidations, normal customer churn and the ongoing weakness in IPO activity, resulted in a modest decline in subscription revenue in the quarter. The decline in subscription revenue was partially offset by price increases, higher service revenue and new customer wins.
During the fourth quarter, we made continued progress to expand the adoption of ActiveDisclosure. Following a sequential increase in net client count during the third quarter, we realized the sequential increase in client count again during the fourth quarter. The momentum in client count growth, coupled with product enhancements we have released, create a strong foundation for sales growth in 2024 and beyond. We expect ActiveDisclosure's growth rate in the second half of 2024 to be stronger than the first half as some of the headwinds we experienced in 2023 continue to play out in the first part of 2024.
Adjusted EBITDA margin for the segment was 26.5%, an increase of approximately 530 basis points from the fourth quarter of 2022, primarily due to higher net sales volumes and cost control initiatives, partially offset by higher selling expenses as a result of increased net sales and higher incentive compensation expense. Net sales in our Capital Markets Compliance and Communications Management segment were $68.3 million, a decrease of $5.1 million or 6.9% from the fourth quarter of 2022, primarily driven by lower event-driven or transactional net sales. We recorded approximately $50 million in fourth quarter transactional revenue, in line with our expectations.
Similar to the trends we experienced during the first 9 months of the year, the demand environment for equity transactions remained soft in the fourth quarter, though the rate of decline continued to moderate as we overlap periods of weak demand in 2022. Adjusted EBITDA margin for the segment was 30.7%, a decrease of approximately 120 basis points from the fourth quarter of 2022. The decrease in adjusted EBITDA margin was primarily due to lower transactional sales volumes, partially offset by cost control initiatives.
Net sales in our Investment Company Software Solutions segment were $25.7 million, an increase of 1.6% versus the fourth quarter of 2022, primarily driven by growth in the ArcDigital and ArcRegulatory modules within Arc Suite. As expected, the growth rate in the fourth quarter was slower compared to the third quarter of this year, which was aided by higher onetime services and support revenue. On a full year basis, total Arc Suite delivered approximately $107 million in revenue and grew 7.4% year-over-year, driven by growth in subscription revenue as a result of the continued strong adoption of Arc Suite within investment companies. Based on the incremental revenue from Tailored Shareholder Reports, we expect stronger Arc Suite revenue growth starting in the second half of 2024.
Adjusted EBITDA margin for the segment was 31.5%, a decrease of approximately 530 basis points from the fourth quarter of 2022. The decrease in adjusted EBITDA margin was primarily due to higher product development and technology investments in support of growth opportunities such as Tailored Shareholder Reports and higher incentive compensation expense, partially offset by cost control initiatives.
Net sales in our Investment Companies Compliance and Communications Management segment were $34.5 million, an increase of $8.9 million or 34.8% from the fourth quarter of 2022, primarily driven by higher event-driven revenue from a large mutual fund special proxy project. Adjusted EBITDA margin for the segment was 30.1%, an increase of approximately 860 basis points from the fourth quarter of 2022. The increase in adjusted EBITDA margin was primarily due to higher net sales volumes and the impact of cost control initiatives, including continued synergies from our print platform consolidation, partially offset by higher incentive compensation expense.
Non-GAAP unallocated corporate expenses were $10.9 million in the quarter, an increase of $2.8 million from the fourth quarter of 2022, primarily driven by an increase in expenses aimed at accelerating our transformation and higher incentive compensation expense, partially offset by the impact of cost control initiatives. Free cash flow in the quarter was $56 million, a decrease of $2.5 million compared to the fourth quarter of 2022. The year-over-year decline in free cash flow was primarily driven by higher capital expenditures related to investments in our software products and the underlying technology to support them, partially offset by an increase in adjusted EBITDA.
We ended the quarter with $124.5 million of total debt and $101.4 million of non-GAAP net debt, a reduction of $44.7 million and $33.6 million, respectively, versus year-end 2022. At year-end 2023, we had no outstanding borrowings under our revolver and had $23.1 million of cash on hand. As of December 31, 2023, our non-GAAP net leverage ratio was 0.5x.
Regarding capital deployment, we repurchased approximately 82,000 shares of common stock during the fourth quarter for $4.6 million at an average price of $56.07 per share. For the full year 2023, we repurchased approximately 469,000 shares for $22.6 million at an average price of $48.20 per share. Going forward, we will continue to take a balanced approach towards capital deployment. We continue to view organic investments to drive our transformation, share repurchases and net debt reduction each as key components of our capital deployment strategy and we'll remain disciplined in this area.
As it relates to our outlook for the first quarter of 2024, we are encouraged by improving level of transactional activity so far in the first quarter, especially in the number of priced and publicly filed IPOs, though overall transactional activity remains well below the historical average. In the near term, we expect macroeconomic headwinds and geopolitical factors will continue to weigh on the return to a more normalized deal activity level. We expect consolidated first quarter net sales in the range of $210 million to $220 million and adjusted EBITDA margin in the mid-20% range. Compared to the first quarter of last year, the midpoint of our consolidated revenue guidance, $215 million, implies growth of approximately 8%. Our margin guidance also implies a higher adjusted EBITDA margin from the first quarter of 2023, which was 21.3%.
I'll also provide a bit more color on our assumptions for the Capital Markets Compliance and Communications Management segment. At the midpoint of our sales range, we assumed transactional sales of approximately $50 million in the first quarter, reflecting an increase of approximately $9 million from the first quarter of 2023. As it relates to the full year, our 2024 operating plan reflects the continued execution of our strategy and associated investments aimed toward accelerating our transformation. Our capital spending, which is predominantly related to development in our software products and the underlying technology to support them, is projected to be between $65 million and $70 million, an increase from the $61.8 million that we spent in 2023. The additional CapEx is aimed at supporting the continued development of our Tailored Shareholder Report solution and advancing toward our single compliance platform vision as part of our future product road map.
From a margin perspective, due to increased investment levels in 2024 to support software product development and sales and marketing initiatives associated with Tailored Shareholder Reports, we expect the Tailored Shareholder Reports solution to have a slightly dilutive impact to DFIN's consolidated adjusted EBITDA in 2024, given its half year impact in 2024 and becoming accretive to consolidated adjusted EBITDA in 2025. Additionally, in 2024, we will continue to make investments to accelerate our transformation. These investments in both software development and associated business processes will support our continued modernization, innovation and growth.
The combined impact of the ramp-up of Tailored Shareholder Reports and transformation-related investments are expected to be offset by higher revenue, continued mix shift into higher-margin software offerings and further operating efficiencies. As a result, we expect our full year 2024 adjusted EBITDA margin to approximate the level we achieved in 2023, which was 26%.
Finally, let me share a few key takeaways from our updated long-term projections. As a reminder, the detailed guidance can be found in our investor presentation posted on our Investor Relations website. First, having historically prioritized business stability while protecting our margins, our focus shifts to driving sustained revenue growth and margin expansion in Chapter 3. Our updated 5-year projections deliver sustainable and profitable revenue growth. Specifically, we expect the growth in Software Solutions to more than offset the declines in Tech-enabled Services and Print and Distribution sales, enabling us to deliver consistent low single-digit consolidated net sales growth annually starting in 2024.
Next, based on the revenue growth profile, we expect to continue to evolve toward a heavier mix of Software Solutions net sales in our 5-year plan. With focused efforts and targeted investments, we project Software Solutions net sales will represent approximately 60% of our total net sales by 2028, up from approximately 37% of total net sales at the end of 2023. In addition to the organic growth we are targeting for our software offerings, we expect to increasingly serve our clients via software, which entails a shift of revenue from traditional services to software over time. Based on our experience in other areas where this has occurred, the shift from traditional services to software produces favorable economics, with slightly lower revenue but higher adjusted EBITDA.
We expect Tech-enabled Services net sales to decline moderately moving forward due to the shift to our software solutions. Consistent with the long-term trend, written distribution net sales will continue to be impacted by secular decline, and by 2028, are expected to represent approximately 15% of our net sales. More importantly, with the growth in Software Solutions, our revenue composition will also become more stable and predictable. By 2028, we expect 80% of our revenue will be derived from recurring and reoccurring use cases, with the remaining 20% being event-driven, comprised primarily of capital markets transactional revenue.
For modeling purposes, we assume total transactional revenue to be flat to the 2023 levels in our 5-year projections, with portions of transactions revenue historically recorded within Tech-enabled Services shifting to Software Solutions over our projection period. The combination of an evolving revenue mix, specifically growing our high-margin software offerings, along with pricing opportunities and improvements in operating efficiencies creates the basis for a long-term adjusted EBITDA margin expansion. By 2028, we expect adjusted EBITDA margin to exceed 30%, with a ramp-up in margin expansion beginning in 2025. The growth in adjusted EBITDA, a moderate level of CapEx and declining interest expense are expected to result in strong free cash flow generation across the projection period. We expect a cumulative adjusted EBITDA to free cash flow conversion of approximately 45% between 2024 and 2028 and expect to generate more than $500 million in free cash flow over this period.
Finally, our long-term capital allocation priorities remain the same. Our approach to the use of capital will remain disciplined and thoughtful, allocating dollars to areas that best advance our strategy and maximize shareholder value. Based on the significant value creation opportunities embedded in our plan, the best and highest use of cash remains investing in the long-term organic growth for DFIN. We are targeting average annual CapEx of approximately $60 million from 2024 through 2028, with the near term expected to require more investment, which will then moderate over time as we gain increased scale and efficiencies.
Next, share repurchases and net debt reduction will each continue to occupy the next highest priority for use of cash. Regarding M&A, we do not have any transactions assumed in our plans. While we will continue to evaluate opportunities that could accelerate our strategy, we will maintain the same discipline that we have exhibited historically. And lastly, we view dividends as the lowest priority for use of cash at this time, and as such, do not anticipate any dividend payments.
We are committed to executing against our long-term plan and continue to find opportunities to create value for all our stakeholders. We look forward to sharing our progress against our updated projections going forward. With that, I'll now pass it back to Dan.
Thanks, Dave. In 2023, we executed well in a very challenging market environment, delivering solid financial results while continuing to invest to become the leading provider of compliance and regulatory solutions. In 2024, you can expect our primary focus to remain on accelerating our business mix shift by continuing to grow our recurring revenue base while maintaining share in our core traditional businesses, including transactions. We will continue to invest in our regulatory and compliance software platform to ready ourselves to capitalize on the demand from future new regulations and non-SEC use cases. In addition, we will continue to aggressively manage our costs and drive operational efficiencies. Finally, we will remain disciplined in the allocation of capital in order to maintain our financial flexibility to execute our strategy.
I am confident that if we do these things well, we will continue to create increased value for our stakeholders, clients, employees and shareholders in 2024 and beyond. Before we open it up for Q&A, I'd like to thank the DFIN employees around the world who ensure our clients continue to receive the highest quality solutions. Now with that, operator, we're ready for questions.
Thank you. [Operator Instructions] We'll go first to Charles Strauzer at CJS Securities.
Given the volatility of the M&A market and the nice growth you showed in Venue, how sustainable is the growth there? And what are the things you're seeing in the M&A market that you can share with us?
Yes, Charlie, thanks for the question. One of the things that we've looked at in terms of Venue, it's not as nearly as volatile as the broader M&A market in terms of completed deals. I think certainly, when you see the number of transactions completed relative to our performance in Venue, a bit of a disconnect there. Even though deals aren't getting done, it doesn't mean they're not getting worked on, et cetera. And the 26% growth that we saw in the quarter, obviously, much, much stronger than the number of deals getting completed.
We look at Venue, again, as being more -- certainly not recurring like ActiveDisclosure or some of the other Arc, the compliance products, et cetera. But certainly reoccurring and more stable than the balance of the transactional business.
That makes sense, great. Just following up there, too. Can you give us a little bit more color into the assumptions that are kind of baked into your near-term guidance? And how should we think about the range? What's kind of baked into each, the high/low there?
Yes. I think -- I assume you're talking about the first quarter guide. It specifically talked about -- in our prepared remarks, the transactional revenue being up pretty significantly relative to last year's first quarter. Now that said, last year's first quarter was the low watermark in recent history. And so while we're seeing a pretty substantial or anticipating a pretty substantial percentage increase, I would say, on an absolute dollar amount, the transactional revenue for the quarter is still expected to be well below historical averages.
Great. And just lastly, when you look at the EBITDA for contribution from TSRs in 2025, how should we think about the margin on that? Is it similar to kind of the historical print margin? Or is it -- do you think it's above that?
Yes. I would say above that. When you look at -- I think, again, it's a combination. Our TSR solution is a combination of software, service and print. And roughly half of it will be software, the balance spread across traditional services or -- and print as well. I think when you think about it on an incremental margin basis, somewhere in the 40% to 50% range is probably -- probably reasonable.
We'll move next to Pete Heckmann at D.A. Davidson.
I apologize, I missed that last question. Forgive me if I'm repeating it. But on the total shareholder -- I'm sorry, the Tailored Shareholder Reports and your thought process there around the total revenue opportunity for DFIN, I guess, how does that compare to what you consider to be the overall potential from that market, I guess, in terms of like -- did you get the -- are you getting this year? Or do you believe you'll get the share that you thought you're going to get? Or are there other competitive solutions that have proven to be a little bit more competitive than what you thought?
Yes. Thanks, Pete. We did well in the market. It continues to play out. I think the big differentiator for us, a couple of things. One is coming off of a -- this is a financial report. And so having the premier financial reporting system in the market -- clearly not the only one, but we believe it's the largest one -- makes it an easier sell to our clients in terms of seamless process, no need to reconcile back to a system because it's coming from the source data for those that operate on our financial reporting tool.
And so where we've seen more price pressure and more fragmentation is really in the back end. The distribution right now under current regulation, there is a print requirement. And so we've seen more aggressive pricing just on the print side. But let me also ask, I don't know if, Eric, if you have anything else to add to that?
Thanks, Dan. Pete, thanks for the question. Yes, I think Dan covered certainly the highlights. I would just say that DFIN's offering, clearly, it's an end-to-end solution from our perspective. We can cover the full spectrum of services. So from software to services to distribution, we have that opportunity to provide an integrated compliance solution, at the same time, cover the entire spectrum. So based on that, we have software opportunities and competitive environment as well as Print, Distribution and the Tech-enabled Services side of things. So given our spectrum of services and our total complete end-to-end offering, we're positioned well to achieve the market results that we were targeting.
Okay. That's helpful. And then just -- I appreciate all the additional longer-term guidance framework that's helpful in thinking about the company. When you -- it seems like software, I'm inferring something in the mid-teens in terms of total software revenue growth over the period, '24 to '28. And -- and number one, is that correct? And number two, is -- I guess, how much of that growth do you think comes from existing solutions versus new solutions? And would you say that based upon some of your development of new solutions, would there be some years that you would expect to be higher than that compound average rate in the mid-teens?
A couple of dynamics in the model, we've put the slides out this morning. So the first, being that what's included in the plan, our known regulatory change, what's not included are things yet to come. So we didn't make an estimate of those. So we believe that based on trajectory of regulatory change as well as time to phase in that anything that gets -- there will be things passed during the planning period that will positively impact '27 and '28 that are not currently being projected.
In terms of the question on the growth rates, the growth rate looks similar in the low- to mid-teens on our compliance offerings. And then in Venue, we've actually -- we're a little bit lower than that. Always a little tougher to call. We've seen a great amount of stability in Venue and upside in Venue, to Dave's comment on its broader -- broader application within the deal ecosystem. But we also think that we'll get benefit from the compliance platform that we're building from our ability to address new regulatory requirements more efficiently and then our ability now that we have these things -- now that we have the compliance platform established within the next 18 months or so that we can also start to target use cases outside of the SEC mandate. And so all of those things channel into what looks a lot like what we've achieved thus far and continuing that, but then also with the upside of being able to move into new use cases as well as additional regulatory change.
Sorry, Pete, this is Dave. I would just add, one of the comments that Dan made. The way we get to the mid-teen growth that we projected for software also includes an assumption that over time, a lot of the work that's done traditionally migrates to a more what we call a hybrid model, right, where there's an aspect of clients using some of the existing software products, but also still relying that full service. So that's just a shift in the mix, and we go through that in some detail in the presentation.
We'll move next to Raj Sharma at B. Riley Securities.
But my first question was just around the software disposition, the eBrevia and EdgarOnline. Is that -- are those being disposed of because functionality -- their functionality is already included in the new ActiveDisclosure Arc Suite?
Yes -- go ahead, Dave.
No, go ahead, Craig.
I'll start and then turn it back to Dave. If we look back at the reason we purchased eBrevia, it was to drive Venue revenue to create product differentiation through using AI for document review. And with that drive to increase Venue revenue, those features from an eBrevia perspective have been incorporated and are complete. So eBrevia as a stand-alone offering had limited value to us. We weren't going to create yet another episodic M&A business. So since our focus is on recurring financial regulatory software, we made a strategic and operational decision to dispose of it. EdgarOnline, similarly, we have those services that are incorporated within our products. And Dave, will turn it to you to expand.
You covered it all, Craig.
Great. Great. And then just briefly on Venue again. Clearly, there's a substantial pickup in Venue. Is that indicative of capital markets pick up forthcoming, but guidance for the transactional business is sort of along the similar vein as last year? And also, is -- is Venue taking share? And can we -- and what can you expect in near-term growth for Venue?
So thank you. Craig again. Venue growth was obviously very strong in the quarter, 26% despite a sluggish M&A market. So up 9% sequentially from Q3, record revenue quarter for us. So Venue continued to perform in a much more predictable manner than its primary use case, which is M&A. So obviously, we all suffered through the market last year. M&A was down 18% in Q4. So what we're seeing is increased room activity, higher activity on existing rooms and higher pricing in Q4. So these rooms are staying open longer, again, reinforcing the stability of Venue. And the underlying demand that we're seeing is less volatile than M&A. So it's reoccurring in nature. So we're generating a more stable revenue stream with what has been an event-driven transactional product.
And we're certainly encouraged by the resilience underneath that. We're hearing from our deal makers that after years of decline, they're finding opportunities despite value adjustments. So the demand for high-quality assets is high. And our pipeline is good. And to your point, it's our belief that we're taking share and executing in our primary markets, most notably in New York. And we're also continuing to grow Venue outside of M&A. In the recurring use cases, such as our subscription business, again, stable recurring venue growth. And we're seeing adoption in franchise and technology and energy and health care.
So we're executing on our plan to take share in any market. And I think our unique position on the deal team from our traditional [ CMCM ] business means that we'll continue to drive software revenue through our Venue virtual data room. So an ecosystem that's certainly working for us.
Yes, great. So just lastly, the total -- the Tailored Shareholder Reports, the revenue and the accretive dilutive guide, does that include the Pay Versus Performance as well? Are all the new regulatory report requirement sort of product lines included in that guidance?
So I'll start, and then turn it to the team. Pay for Performance was a [ 34 Act ] regulatory requirement that we completed in '23 for the first year. So that was included in the proxy statement. So from there, I'll turn it to the TSR team for comment.
Yes, thanks. Yes, the commentary around TSR was specific to TSR, and just to elaborate a bit on that. So the regulation goes into effect in July. So we expect -- of '24, we expect the half year of impact in '24. Certainly, it was dilutive to '23 as we had investment to build the offering. And similarly, we'll have a full year of investment in '24 to build -- finish the build of the offering and then get a half year of revenue, et cetera. And so moving to '25, we get the like-for-like, and to Dave's comment, of a full year of impact is a really attractive financial return just in '23 and '24 as the investment phase.
We'll go next to Kyle Peterson at Needham.
I wanted to start out on software growth. Obviously, the [ 2028 ] targets with the kind of mid-teens growth is great to see. But given that's a pretty big step-up kind of from where we are now on an organic basis, how should we think about the path to get kind of where we are now in that mid- to high-single-digit range up to the mid-teens range and both in timing and kind of how scaled the ramp is?
Yes, go ahead, Dave.
Thanks for the question. So I think when you look at the overall software growth at mid-teens, there's a portion of it based on the existing products, et cetera, that when you look relative to our historical performance on that growth is very much in line. I think when you look at total software sales growth from 2019 through 2023 was about 11.5%. And that's just on the core existing products.
My comments earlier, I think it was Charlie's question around the incremental growth, comes from what we're expecting a shift out of some of the traditional services into more of a hybrid model, right? So leveraging the software products, but also leveraging a lot of the traditional services. And that is what we think -- kind of the delta between the projections relative to our historical performance, which was about 11.5%.
Yes. And just to add to that, we've seen that over time in terms of the shift and to Dave's comments in the prepared remarks, the shift is generally less or slightly less revenue, a similar amount of profitability. So a much improved margin profile when that shift occurs. Calling the timing exactly of that shift is a little tougher, but we found good ability to be able to transition clients and take them -- support them in the way in which they want to work as they move from the traditional side over to the software side.
And I would just add, sorry, the last thing there. The Tailored Shareholder Reports is probably a great example, where it's kind of the initial hypothesis was that it was going to be much more heavily weighted towards software. Then we get to -- you see the details of the regulation and how the market wants to be served. And it's really through a combination of software, services and in the case of TSR print. And so one of the advantages we have in the competitive landscape is being able to serve clients on all 3 of those fronts. And so again, we're going to combine our offerings the way the market wants to work and how best to serve our clients.
And there are no further questions at this time. I would like to turn the conference over to Dan Leib for closing remarks.
Great. Thank you, Audra, and thank you, everyone, for attending. We look forward to being in touch soon. Thank you.
And this concludes today's conference call. Thank you for your participation. You may now disconnect.