Conference Transcript - DFIN 2026-01-13

Analyst (Needham), Analyst — Needham

Hey, everyone, and thank you for joining us at the 28th Annual Needham Growth Conference.

Analyst (Needham), Analyst — Needham

Today's our first in-person day. I'm happy to have you all here. And I'm excited to have with us Donnelly Financial Solutions. And we have CEO Dan Lieb, CFO Dave Gardella, and then Mike Zhao, IR, in the audience. So we'll kick it off with a fireside chat. And I think to start, just in case some investors are not as familiar with the story, could you begin with a quick high-level overview and provide a brief background of the company?

Daniel Leib, CEO

Sure. So thank you. And first off, thank you all for joining us. So we help clients comply with regulations, and those are primarily SEC regulations. It's across transactions as well as compliance. If you think about the business and who our clients are, so it's public corporations, It's pre-IPO corporations, and then it's mutual funds, ETFs, and other regulated insurance companies. The business, we help in a couple different ways, increasingly more with software. So the business has made quite a change since we spun out and became a public company in 2016. We have migrated, and our business now is just under 50% software. There is the balance, which is what we call tech-enabled services, and that a big piece of that will continue to make the migration over to software. Importantly, it's not really software capabilities as the limiting factor. It's really client preference. So we serve across both the do-it-for-me as well as do-it-yourself. We have three main software products that we'll talk about later. And, you know, we've really gone through quite a bit of cultural change as we've made that migration to serving increasingly with software.

Analyst (Needham), Analyst — Needham

Great, thanks. And then next, can you discuss some of the end markets where you are most active and what the competitive dynamics are like? who are your customers and who are you primarily competing against here and

Daniel Leib, CEO

what's it enabled you to maintain such a strong market share sure so we are you know you can split the business into compliance and transactions so for compliance for corporations you can think about 10 K's 10 Q's proxy statements there's in any time there's a deal being done there is a there are compliance requirements around it and the business is increasingly more around the compliance area so the event-driven revenue we would say is now about 25 percent of the overall business 75 percent of our revenue base is recurring or reoccurring and across the products we have three main software products active disclosure which is geared towards corporate compliance we have a venue data room which helps with completing deals and then for mutual funds and ETFs we have arc suite which is a product that is geared towards financial reporting prospectus is we have a total compliance management offering as well for funds and insurance companies relative to where we've been successful and why we do have strong market share across our offerings we are number one two or three in each of the offerings in which we play part of that is having really good software at this point we've rebuilt much of our software solutions in the last few years we also have very strong capabilities in our sales force and so great distribution channel relationships across corporations, funds, third-party administrators, the investment banking community, and then influencers are also law firms. So we have strong relationships there. Also breadth of offering. So coming from where we were, where we were largely tech-enabled services, in many cases as folks are migrating over to software, we can serve them with service packages and help them along managing the process. And then when we ultimately get all the way over to SaaS, we have very strong software offerings. From a competitive set, we have a pretty diverse competitive set. It's different in the data room space, and it's different from data room to corporate compliance, and it's different from corporate compliance to fund compliance. and it's everyone from diversified providers to point solutions and you know as I mentioned we think for us the core capabilities good software great distribution channel and tremendous domain expertise across our service organization which is really helpful for our clients good and I know

Analyst (Needham), Analyst — Needham

management has previously highlighted the long-term target of deriving roughly 60% of total sales from Software Solutions by 2028. Can you discuss how you plan to achieve this and where you're seeing

David Gardella, CFO

the most success currently? Sure, Ross, I'll take that one. You know, I think when you look at our total software offering, as Dan mentioned, it's just under 50% now. That's grown from, call it high teens, from the time we spun out in 2016. And it's really been a combination of taking market share, increasing prices, and then there's still some ongoing transition from some of the traditional offerings onto the software platform. I think when we when we look ahead to that 60% mark, it's really more of the same, more market share, continuing to get get these price increases year in and year out and then some transition from the traditional offerings onto the software platform. I think the one new area of opportunity for us is really exploring some non-SEC use case markets. We now have the total compliance platform that was really the foundation of the new active disclosure product and we'll be able to leverage that going forward for some incremental growth.

Analyst (Needham), Analyst — Needham

Great. And so thank you for discussing the software solutions. I'd like to move over to your second largest offering, which is the tech-enabled services. So what drives the business here, and how is it different from the software solutions offerings?

David Gardella, CFO

Yeah. So this is the piece that what we would call the traditional business, and Dan mentioned the kind of do it for the clients rather than the self-service model. So we employ some proprietary software working with our clients, whether they're the mutual fund clients, corporations, or some of the advisors, law firms, bankers, et cetera, in helping prepare and ultimately file the compliance and or transactional documents around a deal. So you can imagine in an IPO transaction, the lawyers, the advisors working on documents their preference right now is to you know leverage the the model where we do it for them the tech enabled services model there's some of that that that's on the software platform today and we think that'll continue to transition but as of now it's it's a real competitive advantage for us it's what sounds like

Analyst (Needham), Analyst — Needham

that's definitely still a major part of the business even with the transition going on it is and so then I think the last piece there is the print and distribution, which is a smaller part of your overall business, but this is an area that remains important for the company. Can you explain this part of the business and why you think it remains

David Gardella, CFO

popular with some of your customers? Yeah. And so print is clearly the smallest part. It's about 15% of our total revenue. And that's been coming down year in and year out. You go back again to when we spun off in 2016, print was about 40% of our total revenue. We've, I think, through a combination of regulatory change and de-emphasizing the the selling of the print product have really shrunk that down at the same time when you look at from a margin perspective we've increased gross margins from call it low 20% up to mid 40s and that's really a combination of a couple things one we exited a handful of print facilities we're down to one a single digital print facility and then for our long-run print we outsource that to the trade and it's a hundred percent variable model so when you think about the some of the seasonality and cyclicality of print whether it's transactions or printing proxy statements, owning those assets just to be able to produce in certain periods doesn't really make sense. And so, this variable cost model has really helped us drive margin.

Analyst (Needham), Analyst — Needham

Great. Thanks for explaining that. So, it sounds like that's still going to be an important segment, at least in the midterm. Yeah. It's certainly a piece of the offering.

David Gardella, CFO

I guess you think about from an output perspective, some of it's required by regulation, some of it's end customer preference. It's not a business in and of itself, but it's certainly part of the chain. Absolutely. And then switching gears a little bit, now that the

Analyst (Needham), Analyst — Needham

government shutdown is in the rearview mirror and capital markets activity appears to be heating up again with the potential for lots of pent-up demand in early 2026, can you tell us how this will benefit Donnelly? In which areas of the business do you expect to see upside related

David Gardella, CFO

to capital markets? Yeah, and it's really, and I'll hit on some of the areas that we talked about right? So the tech enabled services, there is a print component. We have very strong market share as it relates to the capital markets transactional environment. And, you know, I guess probably a blessing and a curse. Over the last couple of years, it's been more of a curse. When you look at where our revenue sits, it's well below 200 million, I think 160 some million on a trailing basis, that's more than $100 million off the long-term average, and so given our market share, given our client relationships, we certainly stand to benefit from an improvement in the market, and when you think about how that translates into profitability, we would generally think about the incremental margins on that, call it $100 million of delta in revenue there in the 50% to 60% range. So pretty significant profitability impact potential. And then, you know, when you think more broadly about what we've seen in the markets recently, you know, 2025 was an interesting year. We started to see a little bit momentum in Q1. And then, of course, with Liberation Day in Q2 was a bit of a setback, although month to month in Q2 we started to see some improvement that can improvement continued into Q3 and then we get to the government shutdown that you referenced and so that was disappointing to have a bit of a setback to start the quarter the fourth quarter but you know from a market perspective with the government shutdown ending we've seen a really nice bounce back in the overall market and you know that momentum continuing into this year would certainly be helpful great yes it

Analyst (Needham), Analyst — Needham

It sounds like capital markets activity in 2026 could be really beneficial. Yeah, let's hope. Yeah, I mean, you never know what can happen, but hope for the best. Then you touched on it earlier a little bit, but we know that regulations are constantly changing and can be difficult to follow sometimes. Can you help out investors by trying to quantify some of the opportunities you see from any recent regulatory changes?

Daniel Leib, CEO

Yeah, sure. So we think about the regulatory from an SEC perspective, And, you know, this past year we had, and it goes back 18 months, the Tailored Shareholder Reports regulation, which benefited us in 2024 for half a year, and then we got the full year impact in 2025. There are not a ton of regulations on the docket at this point. There's always some small ones that we'll benefit from. So, Edgar Next is a security regulation that helps corporations file with the SEC in a more secure way. We are helping facilitate that for our clients. So, there will be things like that. There's always some small changes. And then, you know, to Dave's point on our opportunity from an expansion perspective and growth perspective, is both market share and organic, as well as organically entering new markets and building off of the strong client base that we have. And so historically, we've had that opportunity to do that in-year. We also rolled out within our venue Data Room product a brand-new product in the fourth quarter of 2025. So, that helps us, while it doesn't expand the overall size of the market, it certainly helps us address different aspects of the existing market in a more effective way.

Analyst (Needham), Analyst — Needham

Great, thank you. I think the next question is one we have to ask. It comes up all the time at conferences and on, you know, earnings calls. Can you discuss how Donnelly is leveraging artificial intelligence across its product suite and internal operations, specifically what opportunities and risks does AI pose to the business?

Daniel Leib, CEO

Yeah, so, you know, to your point, question comes up all the time, ton of internal discussion at the board level and down through the management team and deeper in the company. And we look at it, it's multi-layered, right? So first of all, we're helping clients comply with regulations. So security is really important. Accuracy is critical. So that's, those are foundational pieces. And then we look at it split and it's symmetrical, right? Our expectation of our vendors is that they're helping us in AI with our business processes. And for anything that is proprietary and unique, we may be building some tools to help us drive efficiencies in the organization, take advantage of the latest technology, whether or not that is artificial intelligence or otherwise. And then the symmetrical piece, our clients are looking for us within our products. So for a few years now, we've invested in artificial intelligence. We've made one public announcement, which was active intelligence, which allows our clients to more effectively do benchmarking against peers, benchmarking and disclosures against themselves more efficiently managed documents and content and so that that's a foundational piece and then within each product we're looking at and and have rolled out some some functionality that utilizes artificial intelligence but you know it's a I would say a very balanced approach from a you know threats opportunities I think that speaks to much of the opportunity and then you look at threats and there are aspects of the business or small components the same things that we're looking at to drive efficiencies that could be threats but we look at what we're doing is significantly broader so you know it well we we could drive one component to be more efficient and that could help a competitor if it wasn't us that developed it, we think we'd be able to take advantage of the same technology, and, you know, our offerings are intertwined and much broader.

Analyst (Needham), Analyst — Needham

Yeah, so it sounds like from a competitive dynamic perspective, you know, you and the competitors can probably do a lot of the similar things, but then you have an outside advantage. So really, there's actually a tailwind for you with AI compared to your competitors.

Daniel Leib, CEO

Yeah, I think that's exactly right. And then on the internal efficiency, there's a lot of opportunity.

Analyst (Needham), Analyst — Needham

And then, you know, speaking of internal efficiency, Donnelly has done a great job of improving margins. How have you been able to drive this leverage, and how much more juice is there on the margin front moving forward?

David Gardella, CFO

Yeah, great question. I think, you know, when you look at EBITDA margins, they've gone from, call it mid-teens, up to close to 30% now, and our long-term guidance is to be north of 30%. And it's really a combination of several factors, some of which we talked about earlier in terms of, you know, variabilizing the cost structure in the areas that are more cyclical certainly the business mix shifting away from print and service to more more software based and the operating leverage that you get on the software revenue definitely as an accretive impact to to margin and then I would say the last two factors in no particular order, just kind of the ongoing focus on discipline cost management and really looking at the cost structure across the organization, always fine-tuning it, always trying to figure out better ways, you know, leveraging AI, leveraging some other technology in terms of driving internal productivity, and then certainly on the pricing side. And a lot of this is also tied to the shift toward the software business. Tends to be more long-term contracts with annual price escalators. And so that certainly helps the overall margin profile.

Analyst (Needham), Analyst — Needham

Okay, so it sounds like your long-term target of reaching the 60% of sales from your software business is actually going to help improve margins overall down the road.

David Gardella, CFO

Yeah, and I would say there's two factors there. One is just the overall operating leverage on the software piece drives margin. One aspect that we didn't talk about yet was the component of the, call it the compliance and tech-enabled services that's transitioning over to software. What we've seen so far is from an overall revenue perspective that activity moving from this traditional service model over to software typically comes over at less than dollar for dollar on a revenue basis but the profit dollars are the same or higher and so from a margin perspective it's actually an improvement in overall overall profit margin great thank you that's really helpful and so

Analyst (Needham), Analyst — Needham

our last question here can you tell us about Donnelly's capital allocation strategy. How do you guys balance ongoing share buybacks with potential M&A? And if M&A does come on the horizon, what would be attractive in a potential target? Yeah. So I would start out at

David Gardella, CFO

a higher level, I think, from all capital deployment. And it's organic investment. It's the operating cost structure, et cetera. We look at every dollar we're spending. We take a very disciplined approach. I think specific to the question, when you look at what we've been able to do with organic investment relative to some of the valuations for assets that would be a good strategic fit for us, you can't make the economics work just given the high valuations of any of those assets. And then again, looking at what we've been able to do organically, we have a lot of confidence in the internal team and the investments we're making you know hypothetically if there were an acquisition that that would come up it would be more the same right more being able to to drive that software business help us more fully penetrate get into adjacent markets we haven't seen anything at this point the adjacent markets will definitely be a growth focus for us. But again, we're going to take a broader, higher level view and balance that between investing organically. And if there are M&A opportunities, we'll certainly evaluate that.

Analyst (Needham), Analyst — Needham

Yeah, so it sounds like you're not really hunting for M&A, but you're trying to really have a balanced approach. Balanced. I think balanced is the way to say it. Great. That's good to hear. And then before I open it up for questions, I just want to know, is there anything that you're really excited about in 2026 and beyond? And are there any areas within the Donnelly story that you think investors are missing and should focus on more

Daniel Leib, CEO

closely? Yeah, sure. So several things extremely excited about. You know, we've talked about since we spun, we've talked about the transformation of the business in three chapters. You know, one was establishing the foundation. The second was fundamental transformation. And the third is sustained growth. And we are now closing chapter two, which has really been functionalizing the business, professionalizing processes, resourcing, all of those things. And increasingly, as we move to the tail end of chapter two, we've been focusing much more on growth opportunities across the business. And the reason that the chapters, as the metaphor, the structure, allow us to focus on growth is we've done the foundational work. So we've rebuilt some of the products. Dave referenced the compliance platform that we have allows us to get into market quicker. And so the opportunities Dave referenced, one was expansion, utilizing our capabilities, our domain expertise and then leveraging off of the large installed base of clients that we have to offer them additional modules that Append logically on to like a compliance filing for SEC's SEC filings or of the like and there's there's a lot of those sorts. We provide some today via partnership like SOX compliance or ERM compliance, office of the CFO type of responsibilities. Another area that we've talked about and we rolled out a new offering called ArcFlex is an offering to serve the private funds market, which we think is great opportunity getting a lot of client interest you know there is not a broad regulatory framework you know private markets quite large so you know the regulatory framework will help folks transact but even absent a robust framework we're hearing from our clients they need more robust offerings than just spreadsheets. And so that's been helpful for us. We're getting a ton of interest. We've had a few folks transact as they become more, I've said regulatory, but I'll use even standards. And it can be as simple as an internal standard at one of our clients. They'll start to be able to employ software more robustly. So that's the second one. And the third one, which I referenced earlier, was the rebuild of Venue that was rolled out in the fourth quarter of 2025 really positions us nicely to address a larger part of the market.

Analyst (Needham), Analyst — Needham

I was wondering if you could kind of quantify some of that private markets opportunity. What do you see it growing to, and what's the rough time frame there?

Daniel Leib, CEO

Yeah, we are doing a lot of work on it. We have some internal estimates, but nothing we would put out publicly today.

Analyst (Needham), Analyst — Needham

It's worth trying. Thank you. And with that, I'd like to open it up to the audience if anyone has any questions.

Operator

Jamie said he's going to stop you. That struck me as a little bit of a big deal, but I couldn't figure out if it was a tolerance or a sense argument or a political action. I was wondering if he had any enlightenment on that, and then as a corollary, he said that he had AI stuff to take it internally. As the market becomes dominated by larger and larger companies, does that affect you guys in any way?

Daniel Leib, CEO

Sure. Yeah, so I think what you were referring to is comments about not utilizing shareholder advisory services. We don't provide those services. That offering is shareholder voting guidelines and governance. We also have some of those services ourselves, but that's not our business that we're in um did you think it was dollars or cents or was it politics i i i can't comment um i i think that you know we see as as a public company some of our shareholders um have their own uh groups that offer their own advisory and governance and how they vote their shares others rely more heavily on third parties so i but i don't know in the instance of J.P. Morgan. I think to your second part of the question, the larger companies and as businesses get larger, we're very well positioned. Those are some of our larger clients that we have very strong relations with. So we think what we do provides a lot of value and is something that, you know, folks want to make sure is done efficiently, correctly, and so we think we're well positioned.

Analyst (Needham), Analyst — Needham

Great. I'll ask one more question that I'm kind of curious about. Could you maybe dive a little deeper into your three, you know, core products, I'd call them, the Venue, Data Room, Activist Closure, and ArcSuite? You kind of talked about the end markets where they're used. Maybe you could talk about some more of the competitive dynamics and how they are differentiated.

David Gardella, CFO

Yeah, sure. So I think when you look at, I'll start with Venue, Data Room, we're number three in that market. Two other competitors are significantly larger than us there. I think when you look at, and Dan mentioned, you know, the release of the new Venue product in the last quarter, already getting some nice traction. So, you know, feel good about the opportunity ahead there. And again, the primary use case we talked about is M&A for venue, but there are other, you know, areas of the market where the data room can be used. I think if you go to active disclosure, you know, probably the main competitor there is Workiva. And when you look, again, active disclosure, newest technology in the market, really showing some nice growth over the last couple years. and we feel good about the prospects going forward. And I think similarly, when you look at ArcSuite, very entwined with our clients' back office functions, again, provide a lot of value there. I think that business probably tends to be more sticky, more stable, and really what will drive kind of when we've seen in certain years There's outsized growth, really regulatory-driven, right? So the most recent ban reference with tailored shareholder reports over the last couple years has really helped drive some of the growth in ARC Suite.

Daniel Leib, CEO

Yeah, the one thing I'll add, which cuts across the compliance offerings, so if you think about what we're doing for compliance, It's largely content management, document composition, data tagging, filing, and then each of the products also has unique capabilities. So it can be calculation specific to a market, et cetera. So what we've been building over several years is a compliance platform that takes the common services and centralizes those. so that in the instance of filing with the SEC, if there is a change made, we only need to make that change once, and products can call on that service and utilize it, and yet we can keep the market-centric or market-specific functionality embedded in the product. And that's really been helpful for us as new regulations come about for us to be faster to market and also get into market more efficiently. So it lowers the bar on entering new markets or providing new offerings that require some of those or all of those capabilities.

Analyst (Needham), Analyst — Needham

All right. So I know also, if I don't have any other questions, if not, I have a few more things I was interested to ask about. So I noticed you talked about private markets and, you know, didn't get too much there, unfortunately. But are there any other kind of new areas looking to enter in the near future?

Daniel Leib, CEO

Yeah. So I'll start. I don't know if you mind. There are. I mean we're you know as I talked about the chapters and and dedicating more resource You know that there are more Ideas than Going to be ability to do it. Well, and so we're spending a lot of time to make sure That we do the appropriate amount of diligence ourselves before we're you know spending significant money we obviously you know spend some seed money exploring markets and such but nothing yeah i would talk about it in the context of the new venue and there's additional investment going on there the active disclosure and the ability to increase use cases around office of the cfo arc suite we're doing a lot of work and including work on private markets and then overarching over everything would be spending and exploration on AI all right so I think

Analyst (Needham), Analyst — Needham

also I'm curious is there anything that keeps you guys up at night that you're

David Gardella, CFO

worried about maybe in the mid to long term yeah I mean I you know the short answer is no I would say you know probably the the biggest variable in our business is obviously the capital markets transactional side but again And we're at a, you know, historical low in terms of our revenue and our, you know, margin profile, cash flow still very, very strong. And so, you know, maybe what keeps me up is the excitement about the potential for the capital markets activity to come back.

Analyst (Needham), Analyst — Needham

Yeah.

Daniel Leib, CEO

Yeah. And I would also say I sleep fairly well. Having a large dog in our bed isn't helpful. But, you know, similarly, I think, and that's a change relative to 10 years ago when we spun out. I think we have fantastic employees and associates that work in our company that do a great job. I think we've got things operating really well, and that's really helpful. That said, we do, to Dave's point, have some offerings that are more sensitive to economic cyclicality, much less than ever before, and I feel like the business is substantially more stable because of the actions we've taken, because of the areas that we've invested and grown relative to history, but we still have some volatility still caused by cyclicality.

David Gardella, CFO

I would just add a much cleaner balance sheet as well. Yeah, absolutely.

Analyst (Needham), Analyst — Needham

great so those are all the questions i have is there anything else from the audience

Operator

i think we can wrap it up yeah all right thank you thank you very much