Executive Summary / Key Takeaways

• Donnelley Financial Solutions (DFIN) is successfully executing a strategic transformation, shifting from traditional print and tech-enabled services towards higher-margin software solutions for financial regulatory and compliance needs.
• This mix shift, coupled with aggressive cost management and operational efficiencies, is driving significant adjusted EBITDA margin expansion, demonstrating the company's resilience even amidst a prolonged downturn in capital markets transactional activity.
• Key software offerings like Venue, ActiveDisclosure, and the Arc Suite platform (including the Tailored Shareholder Reports solution) are experiencing strong growth and adoption, fueled by technological enhancements, regulatory tailwinds, and a differentiated hybrid service model.
• Despite near-term uncertainty in transactional markets and expected declines in print revenue, DFIN's strong balance sheet, ample liquidity, and disciplined capital allocation strategy (including significant share repurchases) position it to invest in future growth and enhance shareholder value.
• Investors should monitor the continued trajectory of software growth, the timing and strength of a recovery in capital markets transactions, and the company's ability to sustain margin performance through ongoing cost discipline and strategic investments.

The Foundation of Compliance: DFIN's Strategic Evolution

Donnelley Financial Solutions, Inc. (DFIN) operates at the intersection of finance, regulation, and technology, providing essential software and tech-enabled solutions that empower public and private companies and investment firms to navigate complex compliance and transactional requirements. Spun off from RR Donnelley in 2016, DFIN inherited a legacy rooted in print and traditional services, but its strategic trajectory has been firmly aimed at transforming into a software-centric provider. This evolution is a direct response to powerful industry trends: technological advancements enabling clients to manage more of their disclosure processes internally, evolving workflow preferences favoring digital tools, and a dynamic regulatory landscape demanding greater use of structured, machine-readable data.

The competitive landscape is populated by both large, diversified players like Broadridge Financial Solutions (BR) and SS&C Technologies (SSNC), as well as more specialized firms. Broadridge holds a significant share in investor communications, leveraging its scale, while SS&C is strong in investment management software with broad integration capabilities. FactSet Research Systems (FDS) competes more on the data and analytics side. DFIN positions itself by emphasizing deep regulatory expertise, a high-touch service model, and increasingly, differentiated technology that offers specific advantages in compliance workflows and transaction management. While larger competitors may benefit from greater scale and broader platform integration, DFIN aims to carve out and expand its market share through specialized tools, faster innovation cycles in core regulatory areas, and a unique hybrid approach that combines software efficiency with expert service. This strategic positioning is crucial as clients seek partners who can simplify complexity and ensure accuracy in an ever-changing environment.

Technological Edge: Powering Compliance in a Digital World

At the heart of DFIN's transformation lies its suite of proprietary software solutions: ActiveDisclosure, the Arc Suite platform, and Venue. These technologies are not merely digital versions of old processes; they represent a fundamental shift in how DFIN serves its clients' regulatory and transactional needs.

ActiveDisclosure is DFIN's flagship compliance software, designed to streamline the creation, collaboration, tagging, validation, and filing of SEC documents. The new build, fully operational since mid-2023, offers enhanced capabilities that are driving tangible benefits. Management has noted continued growth in net client count and higher subscription value per client, contributing to an 11% year-over-year growth in annualized recurring revenue (ARR) for ActiveDisclosure in Q2 2024, inclusive of contracted service packages. Clients are increasingly adopting service packages and migrating traditional activities, such as annual proxy document preparation, onto the platform, reflecting improved capabilities and evolving workflow preferences.

The Arc Suite platform provides cloud-based solutions for investment companies, enabling the storage, management, and submission of compliance and regulatory information. Its modules, including ArcReporting and ArcDigital, are benefiting significantly from the Tailored Shareholder Reports (TSR) regulation. This regulation, effective mid-2023 with a July 2024 compliance date, is a prime example of how regulatory changes create opportunities for DFIN's software. TSR is expected to generate $11 million to $12 million in incremental recurring software revenue annually, with half recognized in 2024 and the full amount in 2025. DFIN's ability to offer a one-stop shop covering the full spectrum of TSR needs—from SaaS-based solutions via ArcReporting to traditional services for composition, tagging, and filing—demonstrates its platform's flexibility and deep domain expertise. The company was recognized with the 2024 NOVA Award for its TSR solution, highlighting its leadership and innovative approach in responding to this complex regulation. Arc Suite also positions DFIN to address emerging trends like financial reporting for alternative investments and broadening access to private markets for retail investors, leveraging its platform to drive cost efficiencies and streamline processes for clients.

Venue, DFIN's virtual data room offering, supports transactional processes by providing a secure, efficient platform for due diligence and deal management. Despite the soft transactional market, Venue has shown remarkable resilience and growth, increasing approximately 26% year-over-year in 2024 to nearly $140 million in revenue. This growth is attributed to strong sales execution, increased page volume on the platform, and higher pricing. While Q1 2025 saw a moderate decline due to tough comparisons against large deals in the prior year, management remains encouraged by Venue's performance, which benefits from stable demand across announced and unannounced deals for both public and private companies.

DFIN is actively investing in its software offerings and associated technologies. Capital expenditures, projected to be between $65 million and $70 million for 2025, are predominantly related to software development. These investments are aimed at advancing towards a single compliance platform, developing solutions for new regulations and use cases, and modernizing operations through automation and AI-driven tools. The goal is to streamline workflows, improve productivity, profitably scale existing products, increase speed to market, and enhance the client experience, further solidifying DFIN's competitive moat against rivals who may lag in regulatory-specific technological innovation.

Performance and Profitability: The Fruits of Transformation

DFIN's financial performance over the past year reflects the impact of its strategic transformation and the challenging market environment. For the full year 2024, net sales were $781.9 million, a decrease from $797.2 million in 2023, primarily due to a significant reduction in event-driven transactional revenue, which hit its lowest annual level in the company's history. However, this top-line pressure was substantially offset by robust growth in software solutions, which reached approximately $330 million in net sales for 2024, growing 13.8% organically and comprising 42.2% of total sales, nearly achieving the "44 in 24" goal. For the first time in 2024, software solutions became the largest component of DFIN's overall net sales, surpassing both tech-enabled services and print and distribution.

The shift towards higher-margin software, coupled with aggressive cost management, has significantly boosted profitability. Despite the revenue decline in 2024, adjusted EBITDA increased to $217.3 million from $207.4 million in 2023, and the adjusted EBITDA margin expanded by approximately 180 basis points to 27.8%. This demonstrates the business's increased resilience and ability to operate profitably across varying market conditions.

The first quarter of 2025 further highlighted these dynamics. Total net sales decreased slightly by 1.1% year-over-year to $201.1 million, primarily due to lower capital markets compliance volumes in tech-enabled services ($6.4 million decrease). However, software solutions net sales grew 5.4% to $84.6 million, driven by the TSR offering and non-TSR Arc Suite growth, partially offset by lower Venue sales compared to a strong prior year quarter. Income from operations increased by 2.7% to $45.8 million, benefiting from lower cost of sales ($7.1 million decrease) and lower SGA expenses ($7.0 million decrease), which included a $2.7 million reduction in bad debt expense due to the strategy of deprioritizing lower-quality transactional deals. The adjusted EBITDA margin in Q1 2025 reached a strong 33.9%, bringing the trailing four-quarter margin to 29.5%. This margin expansion was driven by a favorable sales mix, cost control initiatives, and lower bad debt expense.

DFIN maintains a strong financial position and ample liquidity. As of March 31, 2025, total debt was $189.5 million, and net debt was $173.3 million, resulting in a non-GAAP net leverage ratio of 0.8 times. The company amended its credit agreement in March 2025, securing a new $115 million Term Loan A and a $300 million Revolving Facility maturing in March 2030, using the proceeds to retire the prior Term Loan A. This provides significant financial flexibility, with $240.2 million in net available liquidity (Revolver availability plus cash) at the end of Q1 2025. While Q1 is typically a user of cash due to seasonality, free cash flow was negative $51 million, impacted by working capital timing and performance-based payments. However, the company generated robust free cash flow of $105.2 million in FY 2024, and expects seasonality to lessen as the software mix increases. Capital allocation priorities remain organic investments, share repurchases, and net debt reduction. The company repurchased $41.8 million of common stock in Q1 2025 and an additional $27.6 million through April 29, 2025, reflecting confidence in the business's value at recent trading levels.

Outlook and Future Trajectory

Management's outlook for the second quarter of 2025 reflects a continued challenging operating environment marked by market volatility and uncertainty. They guide for consolidated net sales in the range of $215 million to $235 million, implying a year-over-year reduction of approximately 7% at the midpoint ($225 million) compared to Q2 2024. This anticipated decline is primarily attributed to lower print and distribution sales, including a timing shift of volume from Q2 into Q1 2025 and the impact of the TSR rule reducing print page volume, as well as an expected decline in Venue sales due to tough comparisons against large projects in Q2 2024. Capital markets transactional revenue is projected in the range of $35 million to $45 million, down approximately $5 million from Q2 2024 at the midpoint, and a modest year-over-year decline is expected in compliance-based sales within the CM-CCM segment.

Despite the top-line headwinds, DFIN expects to maintain strong profitability, guiding for an adjusted EBITDA margin in the mid-30% range for Q2 2025. This reflects the ongoing benefits of the favorable sales mix shift towards higher-margin software and continued cost discipline.

Looking beyond the near term, DFIN's strategic direction remains clear. The company is focused on accelerating its business mix shift to achieve its long-term target of approximately 60% of total net sales from software solutions by 2028, supported by continued investment in its regulatory and compliance software platform. TSR is expected to provide incremental revenue benefits throughout 2025, and ActiveDisclosure and Arc Suite are anticipated to continue their growth trajectories. While the timing of a significant rebound in capital markets transactional activity remains uncertain, the underlying latent demand for transactions is viewed as intact, presenting a potential upside when market conditions improve. Future regulatory changes, such as the Financial Data Transparency Act, also represent potential opportunities for recurring revenue growth.

Risks and Considerations

While DFIN's transformation is progressing well, several risks could impact its trajectory. The volatility of the global economy and financial markets remains a primary concern, directly impacting demand for transactional and Venue offerings. A prolonged downturn in deal activity could pressure revenue and potentially affect the pace of software adoption in certain segments. The secular decline in print and distribution volume is a persistent headwind, requiring continuous cost management and successful migration of clients to digital solutions.

Operational risks include the ability to retain existing clients and attract new ones in a competitive market, maintaining the confidentiality and security of client data, and successfully adapting to evolving technologies and client demands. The implementation of new systems, such as the quote-to-cash process, carries execution risk. Financially, while leverage is currently manageable, a significant decline in operating results could impact compliance with debt covenants. The termination of the frozen defined benefit pension plan in 2025 requires a cash contribution, the amount of which depends on market conditions and participant elections.

DFIN is actively mitigating these risks through its strategic focus on recurring software revenue, disciplined cost control, ongoing investment in its technology platform, and a balanced capital allocation strategy that includes share repurchases at attractive valuations. The company's strong market position and deep regulatory expertise provide a degree of insulation, particularly in the compliance segments.

Conclusion

Donnelley Financial Solutions is executing a compelling transformation, successfully shifting its business mix towards higher-margin software solutions despite a challenging external environment. The company's differentiated technology, particularly ActiveDisclosure, Arc Suite, and Venue, is driving growth and enhancing its competitive position in the regulatory and compliance market. This strategic pivot, combined with rigorous cost management, is yielding significant margin expansion and demonstrating the underlying resilience of the business model.

While near-term market volatility and the secular decline in print present headwinds, DFIN's strong balance sheet and disciplined capital allocation provide a solid foundation for continued investment in its software platform and returning value to shareholders. The long-term investment thesis hinges on the continued acceleration of software growth, the potential upside from a recovery in capital markets transactions, and the company's ability to sustain and expand its profitability profile. Investors should closely monitor the growth trajectory of the software segments, particularly the adoption of ActiveDisclosure and the impact of TSR, alongside signs of improvement in the broader deal environment.