Donnelley Financial Solutions, Inc. Q1 FY2022 Earnings Call

Good morning. My name is Emma and I'll be your conference operator today. At this time, I would like to welcome everyone to the Donnelley Financial Solutions first-quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to address your question again press the star one. Thank you. Mr. Mike Zhao, Head of Investor Relations, you may begin your conference.

Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions first-quarter 2022 results conference call. This morning, we released our earnings reports, supplemental trending schedule of historical results, and 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 quarterly report on Form 10-Q and other filings with the SEC. Further, we will discuss non-GAAP financial information. We believe the presentation of non-GAAP financial information provides you with useful supplementary information concerning the company's ongoing operations, and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the earnings release and related tables for GAAP financial information and reconciliations of GAAP to non-GAAP financial information. I am joined this morning by Daniel N. Leib, David Gardella, Craig Clay, Eric Johnson, Floyd Strimling, and Kami Turner. I will now turn the call over to Dan.

Thank you, Mike. Good morning, everyone. And from all of us at DFIN, we hope that you and your families are doing well. As noted in this morning's press release, our first quarter results were consistent with our expectations, with net sales of $211 million and non-GAAP adjusted EBITDA margin of 24.2%. We delivered solid financial results despite a challenging capital markets transactions environment. Our first quarter performance demonstrates that our strategy and focus has resulted in DFIN becoming more durable and structurally resilient than in the past. As we continue to invest to shift toward a more favorable recurring sales mix, we will continue to aggressively manage our cost structure and be disciplined stewards of capital. Today, we also provided an update to our long-term projections, which are included in our investor presentation that can be found on our Investor Relations website. Specific to our first quarter performance, I am pleased with the continued strong demand for our software offerings, where we delivered year-over-year sales growth of 15.8%, the fifth consecutive quarter of double-digit software sales growth. Software sales represented 33% of total net sales in the quarter, the highest level in DFIN's history. On a trailing four quarter basis, software sales made up 29% of total sales, an increase of approximately 600 basis points from the prior trailing four-quarter period. This continued positive mix shift is a reflection of our progress in transforming DFIN into a software-centric company. A major driver of the first quarter software growth was the performance of our recurring compliance and regulatory Gerben software products. These compliance software offerings grew 19% in aggregate versus the first quarter of last year and accounted for approximately 63% of total first quarter software sales. The continued growth in recurring compliance software is an important step in the transformation of our business mix and financial profile to become more predictable and resilient, regardless of market conditions. Leading the way for our compliance offerings was ActiveDisclosure, our cloud-native solution, purpose-built for SEC reporting, which grew 29% in the first quarter. We designed from the ground up, new ActiveDisclosure delivers fast, simple, and secure SEC filing functions and represents a significant step forward for the marketplace and SEC compliance. As we approach the first anniversary of new ActiveDisclosure's introduction, we continue to make excellent progress 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 major component of our recurring compliance software offering, delivered solid year-over-year sales growth of 15.1%, despite last year's strong first quarter driven by regulatory change. We continue to see increased adoption of our Total Compliance Management offering, a component of our digital offering, at a more modest pace than in 2021 when the solution was first introduced in response to regulatory change. In addition to the growth coming from Total Compliance Management, I am encouraged by the solid subscription revenue growth across the Arc Suite modules. Our transactional software venue experienced tremendous growth in 2021, driven by a robust capital markets transactions environment. Despite the decline in capital markets transactions in the first quarter of 2022, the venue performed very well as the level of underlying activity taking place on our Virtual Data Room platform remained resilient. Venue sales grew 12%, significantly outpacing the market trend of its primary use case, which is M&A. Further, I am proud that Venue has been named U.S.A. M&A Virtual Data Room of the Year by Global M&A Network, a recognition Venue has earned for the sixth consecutive year. Overall, I am encouraged by the performance of our software solutions portfolio and believe both our recurring and transactional software products are well positioned for the future. As it relates to capital markets transaction sales in the quarter, transactional activity was impacted negatively by the capital market volatility, creating a very soft IPO market and a weaker M&A environment, with many companies opting to delay transactions. Specifically, global IPO activity was down 85% and very few large M&A deals were completed in the quarter. Additionally, the SPAC market, which produced a record number of SPAC registrations in 2021, took a significant pause in 2022 as recent market volatility and proposed new regulations dampened enthusiasm across both new SPAC issuances and announced De-SPAC transactions. While there has been a challenging environment to start the year, history has demonstrated that change in the transactions markets can be swift. Let me point to two areas that illustrate the potential for a swift change. First, despite the drastic decline in completed IPOs during the first quarter, our pipeline of in-process IPOs remains robust. DFIN currently has several hundred IPO clients continuing to work on updating their filings with current financial statements in order to be ready to take advantage of the market when the window opens. Our current level of in-process IPOs is comparable to the level we experienced in 2021. Given the steps our clients are taking to remain ready to go public, we expect them to respond quickly when market volatility subsides. Second, regarding M&A, despite increased macroeconomic headwinds, including a sustained high level of inflation and the likelihood of additional interest rate increases, the demand for high-quality assets remains robust. Combined with the record level of available capital and the large existing SPAC universe seeking a target, M&A is likely to remain more resilient. I am confident that with our strong market position and client relationships, DFIN is very well positioned to support the capital markets transactional needs as activity levels return. From an overall sales perspective, the decline in capital markets transactions along with the planned print and distribution sales reduction, more than offset the growth in software solution sales, resulting in a consolidated net sales decline of 14% from last year's first quarter. Excluding print and distribution, year-over-year net sales decreased 10% in the quarter. First quarter non-GAAP adjusted EBITDA was $51.1 million, a decrease of 28% from last year's first quarter, and non-GAAP adjusted EBITDA margin was 24.2%, a year-over-year decline of approximately 480 basis points. While our margin contracted versus last year's first quarter, which had nearly twice the amount of transactional revenue, from a multi-year perspective, the first quarter 2022 non-GAAP adjusted EBITDA margin is much stronger than historical quarters with similar levels of total sales and transactional revenue. Against those quarters of comparable total and transactional sales, first quarter 2022's non-GAAP adjusted EBITDA margin is higher by more than 1,000 basis points, reflecting our improved sales mix. Our ability to operate at a higher level of profitability across varying points in the market's cycle is a further proof point of our strategy and execution, resulting in DFIN being fundamentally more profitable and resilient than in the past. At quarter end, our non-GAAP net debt was lower than last year's first quarter by $30.5 million, resulting in a non-GAAP net leverage of 0.7x, 0.3 times lower than the first quarter of 2021. We repurchased $1.2 million shares during the first quarter of 2022, continuing the trend of opportunistic share repurchases given our current valuation. At quarter-end, we had $123 million remaining on our share authorization. As we have demonstrated over the past several years, our performance has been well ahead of our original five-year plan we provided during our May 2018 Investor Day, as well as ahead of the updates we have shared periodically. With a solid foundation created by the results of our transformation to date, we are well positioned to deliver increasing value to our three stakeholders: our customers, our employees, and our shareholders. We will continue to be guided by our aspiration to become the leading provider of compliance and regulatory solutions and remain focused on executing against each of our plan objectives to drive long-term, sustainable, profitable growth and value creation. Let me highlight one aspect of our long-term plan that we are very excited about. At the time of our spin five years ago, software sales comprised approximately 14% of our total sales. Through our transformation and growth initiatives, we have doubled software sales in five years, which also nearly doubled the proportion of our sales being generated by software sales from 14% in 2016 to 27% in 2021. As we look forward, we see further opportunities in our organic capabilities to more than double software sales mix from our 2021 level. And we expect software will make up nearly 60% of our total sales by 2026. Additionally, our updated projections of exceeding our goal of targeting 44% of our sales from software solutions by the year 2024 are promising. Perhaps more importantly, we expect more than 70% of software sales in 2026 to be recurring revenue, driven by the growth of our compliance software, providing a strong foundation of annual recurring revenue. While we cannot predict the future regulatory landscape, DFIN is well positioned to leverage our software offerings and our sales and deep domain service expertise to address the market needs related to future regulatory changes. We are enthusiastic about the opportunities over the next five years to continue on the path of sustained value creation. Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our first quarter financial results, outlook for the second quarter of 2022, and our updated long-term projections.

Thank you, Dan. And good morning, everyone. First, let me provide some additional details around our first quarter financial performance. As Dan noted, we continue to experience strong demand for our software solutions during the quarter. All three major software products, ActiveDisclosure, Venue, and Arc Suite, again delivered double-digit sales growth, which drove total software sales growth of nearly 16%. From a capital markets perspective, we expected a slowdown in transaction activity at the beginning of the quarter as a result of recent market volatility. Deal activity, especially in IPO, was further dampened by the uncertainty caused by geopolitical conflicts that unfolded in the second half of the quarter. Additionally, first quarter 2022 faced up comparisons as we'll see throughout the year, given 2021's record performance and market conditions. Despite worse-than-expected external conditions facing our largest and most profitable segment, we delivered sales and non-GAAP adjusted EBITDA margin in line with our expectations. On a consolidated basis, net sales for the first quarter of 2022 were $211 million, a decrease of $34.3 million or 14% from the first quarter of 2021. Software solution net sales in the first quarter were $69.8 million, an increase of $9.5 million or 15.8%. Our recurring compliance offering, which includes ActiveDisclosure and Arc Suite, delivered 19% sales growth in aggregate. ActiveDisclosure continued to demonstrate strong sales momentum, posting growth of approximately 29% in the first quarter. Arc Suite grew 15% in the first quarter, driven by the strong demand for our Total Compliance Management solution. Tech-enabled services net sales were $91.7 million, a decrease of $26.8 million or 22.6% due to the decreased capital markets transactional activity, partially offset by higher compliance volume within capital markets. Print and distribution net sales were $49.5 million, a decrease of $17 million or 25.6%, primarily due to lower print volumes associated with the decline in capital markets transactional activity and regulatory-driven reductions in demand for printed materials within investment companies. First quarter non-GAAP gross margin was 53.1%, approximately 160 basis points lower than the first quarter of 2021, driven by lower sales volume and an unfavorable business mix, both related to lower capital markets transactional activity, partially offset by lower incentives compensation expense and the impact of ongoing cost control initiatives. Non-GAAP SG&A expense in the quarter was $61 million, a $2 million decrease from the first quarter of 2021. The decrease in non-GAAP SG&A is primarily due to lower incentive compensation expense and the impact of ongoing cost control initiatives, partially offset by investments in product development and technology. As a percentage of net sales, non-GAAP SG&A was 28.9%, an increase of approximately 320 basis points from the first quarter of 2021. Our first quarter non-GAAP adjusted EBITDA was $51.1 million, a decrease of $20 million or 28.1% from the first quarter of 2021. Our first quarter non-GAAP adjusted EBITDA margin was 24.2%, a decrease of approximately 480 basis points from the first quarter of 2021, driven by less transactional sales, partially offset by lower incentive compensation expenses, as well as the impact of ongoing cost control initiatives. As Dan mentioned earlier, our first quarter non-GAAP adjusted EBITDA margin is much stronger than our historical margins in quarters with similar overall transactional sales. Illustrate this in more detail: in the first quarter this year, with a similar level of transactional sales and slightly lower overall sales compared to the first quarters of 2019 and 2020, this year's first quarter, non-GAAP adjusted EBITDA of $51.1 million is $27.4 million and $21 million higher than the first quarters of 2019 and 2020, respectively. From a margin perspective, first quarter 2022 non-GAAP adjusted EBITDA margin was 24.2% compared to 10.3% and 13.6% in the first quarters of 2019 and 2020, respectively. Our focused efforts to reduce fixed costs across the business and to variabilize our cost structure in specific areas positioned DFIN to be more sustainable and resilient throughout market cycles while driving increased software sales. Turning now to our first quarter segment results. Net sales in our Capital Markets Software Solutions segment were $44.7 million, an increase of 16.1% from the first quarter of 2021, primarily due to the performance of our recurring compliance products, ActiveDisclosure, which had another excellent quarter posting 29% growth, and our Virtual Data Room software Venue, which delivered 12% growth. Despite a slowdown in larger-scale corporate M&A activity during the first quarter of 2022, there remained a relatively strong demand for Virtual Data Room offerings in support of mid-market and private equity transactions. We are pleased with the resiliency of Venue sales momentum, allowing us to overcome a softening M&A environment relative to the first quarter of last year. Non-GAAP adjusted EBITDA margin for the segment was 22.4%, a decrease of approximately 440 basis points from the first quarter of 2021. The decrease in non-GAAP adjusted EBITDA margin was primarily due to higher product development and technology investments, as well as increased allocations of the overhead, partially offset by higher sales and the impact of cost controls. In the near-term, we will continue to incur costs associated with supporting both the AD3 and new AD platforms reflecting a materially complete transition from AD3 to new AD by early 2023, which will eliminate the duplicative costs, helping to further strengthen the margin profile of ActiveDisclosure. Net sales in our Capital Markets Compliance and Communications Management segment were $103.6 million, a decrease of 25.2% from the first quarter of 2021 due to lower capital market transactional activity, partially offset by higher compliance volumes. As we expected, recent market volatility has limited new issuances, led to additional deal abandonments, and delayed certain capital markets transactions. As the quarter progressed, increasing macroeconomic uncertainty and major geopolitical events further escalated market volatility. Combined, the adverse impact of these factors caused capital markets transactional sales to be below expectations for the quarter. In particular, the global IPO market experienced a significant year-over-year decline in deal volume and the stock market was muted following a record 2021 activity level. The declining capital markets transactional revenue is partially offset by our capital markets compliance offering, which achieved year-over-year sales growth of 8%. As a reminder, unlike the volatility inherent in the transactional activity, our Capital Markets Compliance offering, which supports our corporate clients with their ongoing compliance needs, is mostly recurring in nature. We remain well-positioned in the space to capture business, as a result of newly formed public companies and to continue to expand our share. Non-GAAP adjusted EBITDA margin for the segment was 29.6%, a decrease of approximately 1,400 basis points from the first quarter of 2021. The decrease in non-GAAP adjusted EBITDA margin was due to the lower transactional sales volume, partially offset by lower selling and incentive compensation expenses and cost-saving initiatives. As both Dan and I pointed out earlier, DFIN is now fundamentally more profitable compared to historical quarters with similar levels of total and transactional sales. This is particularly noticeable in the Capital Markets Compliance and Communications Management segment, where first quarter 2022 non-GAAP adjusted EBITDA margin exceeded margins from both the first quarters of 2019 and 2020, which had similar total and transactional sales relative to the first quarter of 2022. As an example, in the first quarter of 2019, this segment had overall sales of $102 million and transactional sales of $48 million. Non-GAAP adjusted EBITDA margin was 18.7%. Similarly, in the first quarter of 2020, total sales were $99.1 million, with $46.4 million coming from transactions. In that quarter, the segment's non-GAAP adjusted EBITDA margin was 26.4%. On similar levels of both transactional and total revenue, this year's first quarter margin exceeded the first quarters of 2019 and 2020 by nearly 1,100 basis points and 320 basis points, respectively. While the capital markets transaction environment remains uncertain, we are encouraged by the strong IPO backlog, as well as a pipeline of over 600 SPACs looking for acquisitions. Our industry-leading portfolio of solutions dedicated to our clients' private to public journey positions DFIN well to capture a significant portion of future IPO transactions. Further, our strong market position in the transactional filing business positions us well to also capture a significant portion of future De-SPAC activity, which on average represents 10 times the value of an initial SPAC registration transaction. Additionally, these transactions provide a pipeline for recurring software subscriptions to support our clients' ongoing compliance requirements. We are closely monitoring the recent regulatory changes proposed by the SEC that could impact the future market for SPAC formations and De-SPAC activity. The proposed legislation is aimed at increasing disclosure and investor protections, potentially changing how SPACs function going forward. Regardless of the potential impacts these regulatory changes will have on the SPAC market, the underlying need for private to public transactions will still exist. And we are well positioned across our capital markets transactions offerings to capitalize on future activity. Net sales in our Investment Companies Software Solutions segment were $25.1 million, an increase of 15.1% from the first quarter of 2021, which was also a very strong quarter. Year-over-year growth was driven in part by continued strong demand for our digital Total Compliance Management offering, as investment company clients turned to digital alternatives to adopt new regulations and transition away from print. In addition, solid subscription revenue growth in Arc reporting and our pro also fueled the net sales increase in this segment. Non-GAAP adjusted EBITDA margin for the segment was 36.7%, an increase of approximately 1,100 basis points from the first quarter of 2021. The increase in non-GAAP adjusted EBITDA margin was primarily due to the operating leverage on the increase in sales and lower incentive compensation expense, partially offset by higher product development and technology investments and increased allocations of overhead expense. Net sales in our Investment Companies' Compliance and Communications Management segment were $37.6 million, a decrease of $8.9 million or 19.1% from the first quarter of 2021 due to the impact of regulatory changes and a reduction of print sales related to contracts we proactively exited. Non-GAAP adjusted EBITDA margins for the segment were 25.5%, approximately 980 basis points higher than the first quarter of 2021. The increase in non-GAAP adjusted EBITDA margin was primarily due to price increases on print works, a better mix featuring more services and less print, a reduction in overall expenses within the segment as a result of consolidation of our print platform, lower incentive compensation expense, and reduced overhead costs based on the lower activity level in this segment. As we mentioned last quarter, we have successfully shifted 100% of our offset print production to our third-party vendor network, creating a fully variabilized 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 changes that will continue to reduce this year's demand for print in this segment, we expect a decline in net sales of approximately $40 million, with $10 million of that realized in the first quarter and only a de minimis impact on non-GAAP adjusted EBITDA in 2022. Non-GAAP unallocated corporate expenses were $8.4 million in the quarter, a decrease of $4.1 million from the first quarter of last year. The decrease in unallocated corporate costs was primarily due to lower incentive compensation expenses and the impact of ongoing cost control initiatives. Free cash flow in the quarter was -$62.1 million, which is $15.8 million unfavorable compared to the first quarter of 2021. Relative to last year's first quarter, substantially more than all of the higher use of cash was driven by elevated performance-based payments in the quarter as a result of our exceptional 2021 results. These impacts were partially offset by improved working capital and lower cash restructuring payments, enabling us to deliver a better-than-expected first-quarter free cash flow. From a liquidity perspective, we had access to the remaining $228 million of our revolver, as well as $10.4 million of cash-on-hand. As of March 31, 2022, our non-GAAP net leverage ratio was 0.7 times, down to 0.3 times from the first quarter of last year. As a reminder, our cash flow is historically seasonal. We are a cash user in the first quarter, bolstered to break even 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 sales, we expect the seasonality to continue to become less significant. We repurchased approximately 1.2 million shares of our common stock during the first quarter for $42.1 million at an average price of $34.26 per share. As of March 31, 2022, we had $123 million remaining on our $150 million stock repurchase authorization. The number of shares repurchased in the first quarter of 2022 was the highest amount we repurchased in any given quarter and is consistent with our stated objectives of being more aggressive with repurchasing shares in 2022, as part of our broader capital allocation strategy that will also feature additional investment in technology, development, and net debt reduction. As always, we will maintain our disciplined approach to all capital deployment. As it relates to our outlook for the second quarter of 2022, we expect continued market volatility, driven by aggressive actions to combat inflation, supply chain issues, and ongoing geopolitical uncertainties, which will continue to weigh on the capital markets transactional environment. So far in the second quarter, April prices for IPOs and SPACs remained well below this point last year. Large M&A deal completions are also below last year's level. Taking all these factors into account, and while dealmakers might be cautious, the fundamental drivers of deal-making remain. 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 market stability returns. In addition, we expect sales from print and distribution to continue to decline, but with minimal impact on non-GAAP adjusted EBITDA. Given the historical seasonality of print and distribution sales, the second quarter will experience this year's largest quarterly reduction in print sales due to the impact of SEC Rules 30e-3 and 498A compared to the other quarters this year. 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 second quarter net sales to be in the range of $220 million to $240 million and non-GAAP adjusted EBITDA margin in the mid-20% range, similar to that of the first quarter margin. And once again, much stronger than historical quarters of like size, total, and transactional sales. As Dan noted earlier, while the outlook for the capital markets transaction environment remains uncertain, the pace of activity can change very quickly. Given our market leadership position, DFIN is very well positioned to capture a significant share of future demand for transaction-related products and services. More importantly, our growing software offerings, when combined with our expertise and scale in tech-enabled services, enable us to offer clients an unmatched portfolio of regulatory and compliance solutions. Finally, let me share some additional details on our updated long-term guidance. Our first quarter results and second quarter guidance are proof points that our strategy and transformation are delivering positive results. While we have achieved several significant milestones on our transformation journey, we have even greater opportunities ahead to create increased value for our customers, employees, and shareholders. We will accomplish this through focusing on three value creation levers: accelerating our mix shifts to become a software-centric company, driving long-term non-GAAP adjusted EBITDA margin expansion, and free cash flow conversion, and continuing to prudently deploy capital. Our updated projections reflect our confidence in our ability to execute against all three value creation levers. We believe we have the opportunity to create value by continuing to transform our top line through a software-centric sales mix. With focused efforts and targeted investments, we project software sales will represent 55% to 60% of our total sales by 2026. From full-year 2022 through 2026, we expect total software sales to grow annually in the mid-teens, with our recurring compliance software offerings growing at a high teens rate. Venue, which is more challenging to project given its relationship to the corporate transactions offering, is expected to grow in the mid to high single-digit range annually over the period. By 2026, we expect total software revenue to exceed $500 million. We expect tech-enabled services sales to normalize this year and then decline modestly moving forward, in part due to the ongoing shifts to our software solutions. Consistent with the long-term trends, distribution sales will continue to be impacted by secular decline and by 2026 will represent approximately 10% of our total sales. In aggregate, we expect the growth in software to more than offset the declines in tech-enabled services and print and distribution sales, resulting in consolidated sales growth in the low single digits between 2022 and 2026. Regarding margins, the combination of an evolving revenue mix, the impact of permanent cost reductions, and the variable realization of our cost structure creates the basis for long-term non-GAAP adjusted EBITDA margin expansion. Looking at how our margins will develop over time, in the short term, we anticipate the normalization of transactions revenue combined with increased investments in software growth initiatives will result in near-term margin headwinds coming down from a historical peak margin level driven by the robust transactional environment in 2021. We expect this headwind to be temporary, as software sales growth and improvements in software margins, driven by maturing product capabilities, normalizing investment levels, and improvements in service efficiency will more than offset the margin impact of lower capital markets transaction revenue. By 2026, we expect non-GAAP adjusted EBITDA margin to approach 30%. Next, I will touch on our cash flow projection. Historically, our free cash flow has benefited from an improving business mix featuring higher margins, declining debt levels, and working capital efficiency. Going forward, the growth in non-GAAP adjusted EBITDA, a modest level of CapEx, and a declining interest expense are expected to further improve our free cash flow profile. We expect a cumulative non-GAAP adjusted EBITDA to free cash flow conversion of approximately 50% between 2022 and 2026 and expect to generate more than $500 million in free cash flow over this period. As a reference, our historical non-GAAP adjusted EBITDA to free cash flow conversion rate has been approximately 45% between 2016 and 2021. The financial flexibility and strong cash flow embedded in our updated long-term projections provide us with a range of capital deployment options. Our approach to the use of capital will remain disciplined and thoughtful, allocating funds to areas that best advance our strategy and increase shareholder value. The fluctuations in the capital markets transactional environment over the last several quarters have demonstrated the importance of maintaining a balanced balance sheet, which is aligned with our historical capital allocation decisions. We recognize the priority that debt reduction should occupy, given our evolving business mix, including exposure to the cyclicality of capital markets transactions. With our net leverage down to a very manageable level of 0.7 times, we have the flexibility to be more aggressive with organic investments and share repurchases. We are targeting CapEx as a percentage of sales in the range of 5% to 6% on a cumulative basis from 2022 to 2026. We will continue to be disciplined in our CapEx decisions, taking a staged investment approach to ensure projects are generating returns at or above the expected levels. As a reminder, nearly all of our CapEx goes towards software development and related technology investments. In addition, since the beginning of 2020, we repurchased more than 3.3 million shares for nearly $85 million, and we intend to accelerate our share repurchase activity. As we noted in February, our board approved a $150 million share repurchase authorization that expires on December 31, 2023; we had $123 million remaining on that authorization as of March 31. For modeling purposes, we assumed the full utilization of this authorization by year-end 2023. Regarding M&A, we do not have any transactions assumed in our plans. While we continue to evaluate opportunities that could accelerate our strategy, we will maintain the same discipline that we have exhibited historically. Lastly, reviewing dividends is the last priority for the use of our cash at this time. For modeling purposes, we assume our cash position continues to build, affording us even greater financial flexibility. We expect to reach a net cash position by the end of 2024. We are committed to executing against our long-term plan and to continue to find opportunities to create value for all of our stakeholders. We look forward to sharing our progress against our updated projections going forward. And with that, I'll now pass it back to Dan.

Thanks, Dave. Our performance in the first quarter of 2022 demonstrates that we have the right plans, the right products, and the right people to successfully execute our strategic transformation. Our updated projections further demonstrate our confidence in our strategic aspirations. I am enthusiastic about the opportunities ahead to deliver increasing value to our customers, employees, and shareholders. 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. Now with that, Operator, we're ready for questions.

Thank you. Your first question today comes from the line of Charles Strauzer with CJS Securities. Your line is now open.

Hey, good morning, it is Stefanos Crist calling in for Charlie. Can you give us a little more color on just your efforts to try and improve and maintain margins despite lower volumes?

Yes, this is Dave. I'll address that and then Dan can add in. Thank you for the question. We've discussed this a few times already, but it's worth elaborating. In the first quarter, our margin was 24.2%, and we acknowledge it's lower than last year's first quarter. This year's quarter had only half the revenue from capital markets transactions. As we've mentioned before, this type of revenue generally has a very high margin, or in this case, a lower margin. When we compare this to similar quarters with equivalent transactional revenue, like the first quarters of 2019 and 2020, our EBITDA margin is significantly higher—over 1,000 basis points above the first quarter of 2020 and 1,300 basis points above the first quarter of 2019. Specifically regarding your question, we've implemented permanent changes to our cost structure including reducing headcount, decreasing our real estate footprint, and outsourcing all of our offset printing. Adjusting these fixed costs has been a key strategy for us. Our operations team has managed this transition excellently while also maintaining efficient digital production. It's important to note that these changes, including the headcount and real estate reductions, are permanent. We have seen our margin improve steadily over the last several quarters, and the first quarter is further evidence of that. Additionally, we've eliminated over $100 million in print revenue over the last five quarters, which we know typically has lower margins than our average. Considering these combined factors, we are well-positioned for ongoing margin improvement. When we updated our guidance this morning, we expressed our belief that we could approach a 30% EBITDA margin by 2026.

That's great color. Thank you. I'm going to squeeze one more. Can you give us an update on the competitive environment in the software business?

Yeah, sure. So this is Dan, I'll start and then others can jump in as well. We have varied product offerings, so we have very strong compliance offerings, which is both within the corporate space, predominantly ActiveDisclosure, and then in the funds space, Arc Suite. And so we have different competitors there. There's quite a few that we run into in any space. I think where we've been extremely successful is our product line is able to bridge clients through different stages of their existence, be that pre-IPO, through IPO, through compliance on the corporate side and similarly on the fund space. We've built purpose-built tools to serve the unique needs of fund alternative investments and insurance companies. We look at all the competitors there, and we feel really good about our product portfolio and the progress we're making. When we go to the Venue Data Room, again, we have different competitors, but we feel confident about how that product's performing given its use case and what we see in the broader environment.

Sure. Dan, this is Craig. As Dave said, we remain bullish on software. I'll start where Dan left off, which is Venue. It showed good performance in Q1, significantly better than its use case at 12%. Our Venue pipeline is good, driven by sales execution, but we're also executing the plan to take share given our differentiated product. So our Virtual Data Room isn't just winning awards, as you heard in the prepared remarks. It's winning deals through leading security to safeguard our client's personal identifiable information, contract review, delivering winning results in this competitive market. And as you've heard, M&A is likely to be more resilient. We have a strong position and client relationships, and we'll be there to fight and to win. On ActiveDisclosure, we saw 29% growth competitively, and what we're seeing is that we're still at the center of this regulatory corporate and compliance governance place and we had the trust of our clients.

Key to that is some of our partnerships. One of the key differentiators in ActiveDisclosure is the financial reporting connecting the ERP systems. Our press release yesterday about ActiveDisclosure achieving built-for-NetSuite status is incredibly important. We are the only disclosure tool available on their network, gaining Oracle NetSuite clients and powering confidence in ActiveDisclosure. I feel really good about our place competitively.

Yes. Thanks, Eric. The last thing I'll say to bookend my comments is that if you look over the last five years, we doubled our software revenue. Last year, approximately $270 million. If you look forward five years, we're planning to do that again from our updated guidance to over $500 million of software revenue, predominantly recurring in nature, providing that base of predictable recurring revenue from which to grow.

Good morning, everyone. Thanks for taking the questions.

Morning.

I really appreciate you giving all that context and guidance and that really thoughtful outlook to 2026. I think that's helpful and I think that's the story that the investors should be thinking about here as this mix shift changes. So thanks for that. Just a few little questions. I missed, when did you say the transition to ActiveDisclosure 3 should be complete?

Substantially by the beginning of 2023.

Okay. And then I apologize. I got a distraction right when you were talking about the competitive environment for Virtual Data Room. We have 12% growth on top of a very tough comparison, that was great. Do you think that is an indicator that you're gaining share? Is it maybe that some of the published statistics around M&A, the announced deals, closed deals, maybe aren't the best, given that sometimes these projects can be hosted for multiple months, if not a year? I mean, do you think it's gaining share or is the data not completely correlate with your revenue in that business?

Yes. We do think we're continuing to gain share. We think we gained share last year as well, particularly given our product being more leveraged to M&A. To your point, those statistics are probably the best we have. There is certainly more activity and rooms working than what gets ultimately announced, but we feel really good about the progress we've made there over the past 18 months or so.

Great. And then for my last question, I noticed in the cash flow statement there's a higher provision. I assume that relates to some ongoing SPAC IPOs in the pipeline. Can you discuss your exposure in terms of the work you've completed? I understand that sometimes SPACs may not close, which might not be as favorable as it is with some other clients.

Nothing specific there to comment on. We generally follow a pretty formulaic method for making these reserves as things get expanded out. Well, as you would imagine, the bad debt reserve takes up a little bit. In addition, we'll also evaluate specifics for bankruptcies, etc., just given market conditions and some of the things we see receivables and timing, things like that, just pushed it up a little bit.

Hi. Thank you for taking my question. I wanted you to clarify, following up on software and its growth in the software segment. You're expected to double in the next five years. Can you talk a little bit about where this growth is coming from in terms of client penetration? Are you gaining share in any of this software growth, and is it cannibalizing any of your tech-enabled services at these corporates?

Yes. Sure, I'll start, go ahead, Dave.

Go ahead, Dan.

Looking at it via splitting compliance from transition, as mentioned in the prepared comments, the transactional side is always a little harder to project with volatility; however, the growth there is projected to be slower than what we see on the compliance side. The compliance side has a little bit of cannibalization, but that's not the main driver. The main driver is we rolled out new ActiveDisclosure just about a year ago, and we've been adding new capabilities to our Investment Companies platform, and we see existing share of wallet opportunities. We commented on seeing price uplift and additional term lift as well. The reception we've been getting from our clients and new potential clients really underpins it. I would say when we look at the individual markets that we play in, there is some share take, but nothing inconsistent with what we've experienced since having those products in the market.

Dan, you covered the same points I was going to make. Thanks. Thank you. So I have one last question on the print, just for clarification. I think, Dave you said, $30 million of it will be taken in the next three quarters and most of it, or a large portion of it, in Q2 the print decline.

That's correct, Raj. It's about $10 million in the first quarter, with the balance over the last three quarters of the year. As you said, the biggest chunk of the remaining $30 million will come in Q2, just based on the normal seasonality of some of the historical print volume for that type of work.

Got it. And so, Q2 decline against similarly Q1 or greater?

Yes, probably a little bit greater.

Regarding the capital markets, I know it's inherently an episodic business that relies on transactions in the capital markets. Is it difficult to predict if the transaction volume in the first half of this year will decrease by 30%, or is it just too challenging to make that call?

The short answer is yes, that it's too tough to call. The longer answer is, when we look at the activity that our clients continue to perform with us to stay ready to complete a transaction and what we hear from the investment banking community, we feel encouraged by that. I think typically in a down-market, you may not see all the underlying activity. However, the current down-market that we're in is a little different, just given some of the latent demand based on ongoing activity and supported by what we're hearing from third parties as well.

Yes. Dave, sorry to interrupt. Within any market, we continue to perform. And this one included. We have strong market share across the board, and our performance in Q1 outpaced the market due to strong share and a mix of high profile, high profit IPOs and leasebacks and M&A. Again, our clients are continuing to work on the deals that are in process. Unlike other downturns such as a financial crisis, where everything ended, our clients are still engaged and working. We have quality large deals as reflected in our Q1 performance and in April, IPOs with greater than $100 million and we have all five of the top underwriters, including the largest De-SPAC deals. We continue to perform and maintain market share.

Well, I guess in the Q2 guidance, I thought being given the fact that you've got to get a bigger decline in print and that software should continue on the same sort of growth trajectory, it would seem like the transactional part is perhaps a little bit better than the March quarter. Would that be a fair assessment?

I think it's generally pretty similar.

Thank you for taking all my questions. I'll take the software. Thank you very much. And thank you, everyone for joining us. We look forward to talking in August and with many of you prior to that, so thank you again for joining.

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