DFIN - NYSE

Thanks for standing by, and welcome to the Donnelley Financial Solutions Third Quarter 2023 Earnings Conference Call. I would now like to welcome Mike

Thank you. Good morning, everyone, and thank you for joining Donnelley Financial Solutions' third quarter 2023 results conference call. This morning we have released our earnings report, including a supplemental trending schedule of historical results, copies of which can be found in the Investors section of our website at dfinsolutions.com. During this call, we will 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 details in our most recent annual report on Form 10-K, quarterly report on Form 10-Q and other filings with the SEC. Further, we will discuss certain non-GAAP financial information, such as adjusted EBITDA, adjusted EBITDA margin and organic net sales. We believe the presentation of non-GAAP financial information provides you with useful supplementary information concerning the company's ongoing operations and is an appropriate way for you to evaluate the company's performance. They are, however, provided for informational purposes only. Please refer to the earnings release and related tables for GAAP financial information and reconciliations of GAAP to non-GAAP financial information. I am joined this morning by Dan Leib, Dave Gardella, Craig Clay, Eric Johnson, Floyd Strimling and Kami Turner. I will now turn the call over to Dan.

Thank you, Mike, and good morning, everyone. We delivered strong consolidated third quarter results, given the economic backdrop, with net sales of $180 million, adjusted EBITDA of $49.4 million, and adjusted EBITDA margin of 27.4%. During the third quarter, we navigated a transactions market that despite some signs of improvement remained weak. As a result of strong execution, we increased our third quarter adjusted EBITDA by $4.1 million or 9.1% year-over-year, and expanded our adjusted EBITDA margin by 340 basis points from the third quarter of 2022. Continued strong performance through an extended weak transactions market is an important accomplishment that demonstrates the underlying characteristics of our business, and is a proof point for our broader strategy, namely continuing to evolve toward a profitable recurring sales mix, aggressively managing our cost structure and being disciplined stewards of capital. Consistent with our performance last quarter, our software offerings delivered another quarter of higher sales growth compared to recent trend. Total Software Solutions net sales grew approximately 7% on an organic basis versus the third quarter of 2022. Third quarter Software Solutions net sales growth was led by Arc Suite and Venue, which grew approximately 13% and 9%, respectively. Software Solutions made up 40.7% of total third quarter net sales, an increase of approximately 390 basis points from last year's third quarter. On a trailing four quarter basis, Software Solutions net sales of approximately $288 million represented 36.5% of total net sales, an increase of approximately 480 basis points from the third quarter 2022 trailing four quarter period. Our third quarter performance reflects the strength of our recurring regulatory and compliance offerings. These offerings, which span across both Software Solutions and tech-enabled services serve the compliance needs of corporations and investment companies. As we continue to invest in our recurring compliance products, we will ship DFIN toward a higher mix of profitable recurring revenue, and more importantly, benefit from the financial profile associated with such a recurring revenue model. One key component of our recurring revenue base is our compliance in regulatory-driven software products, which include active disclosure in Arc Suite, each possess the characteristics of traditional enterprise software offerings, with a high component of recurring subscription revenue, as well as long-term contracts. During the third quarter, these recurring compliance software offerings grew 8% in aggregate versus the third quarter of last year and accounted for approximately 60% of total Software Solutions net sales. As discussed previously, we are building a cloud native unified compliance platform then enable shared features across active disclosure in Arc Suite, providing foundational capabilities such as composition, tagging, filing and regulatory and financial reporting into a single solution, while also maintaining market-specific capabilities within the individual products. This platform in conjunction with our deep domain expertise, allows us to better serve recurring regulatory and compliance use cases under current and future regulations and also provides us the ability to expand current SEC-oriented addressable market into adjacent markets and use cases not served by us as a facilitating future recurring revenue growth. As it relates to Venue, historical demand in the data room market has been relatively stable though can fluctuate based on underlying diligence activity taking place related not only to announced deals, but also to those unannounced, both public and private alike. In addition to this market's resilient demand, product enhancement and strong sales execution have also contributed to Venue's steady performance all of which promote more consistent top and bottom-line performance for DFIN. DFIN remains focused on driving profitable recurring revenue growth, a key source of the growth will come from regulatory and compliance opportunities, which have a recurring demand profile, such as the tailored shareholder reports regulation that will come into effect in July 2024. We continue to make great progress in our technology development and go-to-market plans. In mid-October, we achieved an important milestone in our readiness by launching the alpha release of our tailored shareholder reports module that integrates with the financial reporting functionalities of our ArcReporting SaaS offering. This newly introduced SaaS capability is just one component of our end-to-end solution, which also features our industry-leading tech-enabled services and print and distribution offerings. Our full platform solution enables DFIN to adapt to the way our clients wish to work, from self-service, full service or a combination of both. We are encouraged by the positive market response to our solution, and have started onboarding clients onto the platform. We expect tailored shareholder reports will benefit each of our Software, Tech-enabled services, and Print and Distribution offerings. We are currently working to refine the estimated benefits and look forward to providing further details on our February earnings call. As the global regulatory and compliance landscape continues to evolve, DFIN is well-positioned to serve an increasing number of recurring compliance use cases including ESG reporting. With the momentum building globally to adopt ESG measures, the increased level of recurring reporting and disclosure requirement is well-suited for our active disclosure product. In the U.S., we are encouraged by the passing of two California state bills in September, which will require private and public companies operating in California to publicly disclose greenhouse gas emissions by 2026. California is the first state to mandate a robust ESG data collection and disclosure framework. We expect the SEC to follow suit in a broader national level ESG regulations in the near future. In the EU, ESG reporting will become mandatory in 2025, as part of the corporate sustainability reporting directive adopted by the European Commission. By leveraging the functionalities of our active disclosure platform and integrating capabilities from our ecosystem of leading ESG data partners, DFIN offers a robust ESG solution, ready to fulfill upcoming U.S. and EU specific ESG regulations. We look forward to further expanding our recurring revenue growth with this solution. Before I share a few closing remarks, I would like to turn the call over to Dave to provide more details on our third quarter results and our outlook for the fourth quarter. Dave?

Thanks, Dan, and good morning, everyone. As Dan noted, we delivered solid third quarter results in a challenging environment, including strong year-over-year increases in adjusted EBITDA and adjusted EBITDA margin. We posted approximately 7% organic growth in our Software Solutions net sales, including approximately 8% sales growth in our recurring compliance software products, all while continuing to drive operating efficiencies and expanding adjusted EBITDA margin to 27.4%. On a consolidated basis, total net sales for the third quarter of 2023 were $180 million, a decrease of $8.7 million or 4.6% on a reported basis and 4.2% on an organic basis from the third quarter of 2022. Despite a modest sequential improvement in the level of capital markets transactional activity in the third quarter, the overall transactional environment remained weak. In the third quarter, the Capital Markets Transactional business which was down $8.8 million or 15% versus the third quarter of 2022, once again accounted for more than all of the year-over-year sales decline. The decline in Capital Markets transactional sales as well as lower sales related to capital markets compliance activities were partially offset by growth in Software Solution sales, which increased $3.7 million or 5.3% on a reported basis, and 6.8% on an organic basis compared to the third quarter of last year. Third quarter adjusted non-GAAP gross margin was 60.6%, approximately 510 basis points higher than the third quarter of 2022, primarily driven by the impact of cost control initiatives, and the growth in Software Solution sales, partially offset by lower capital markets transactional activity and incremental investments to accelerate our transformation. Adjusted non-GAAP SG&A expense in the quarter was $59.7 million, a $0.2 million increase from the third quarter of 2022. As a percentage of net sales, adjusted non-GAAP SG&A was 33.2%, an increase of approximately 160 basis points from the third quarter of 2022. The increase in adjusted non-GAAP SG&A was primarily driven by incremental transformation related investments and higher bad debt expense, partially offset by the impact of cost control initiatives and a reduction in selling expenses, as a result of lower transactional sales volumes. Our third quarter adjusted EBITDA was $49.4 million, an increase of $4.1 million or 9.1% from the third quarter of 2022. Third quarter adjusted EBITDA margin was 27.4%, an increase of approximately 340 basis points from the third quarter of 2022, primarily driven by the impact of cost control initiatives, partially offset by lower capital markets transactional sales and incremental investments to an accelerate the company's transformation. Turning now to our third quarter segment results. Net sales in our Capital Markets Software Solutions segment were $46.5 million, an increase of 4.4% on an organic basis from the third quarter of last year. Net sales of our recurring compliance product active disclosure grew approximately 4% in third quarter. During the quarter, we made continued progress to expand the adoption of active disclosure. With the decommissioning of the Legacy 83 platform and associated customer churn behind us, we achieved an increase in net client count for the first time this year during the third quarter. Our efforts to increase the value of active disclosure platform has generated nearly $130 million of cumulative subscription contract value sold on new AD. More importantly, this increased value has resulted in our average subscription value per client to increase by approximately 13% from the third quarter of 2022 and is up over 40% from the second quarter of 2020 prior to the launch of new AD. Net sales of our virtual data room offering Venue were up $2.2 million or 8.7% compared to the third quarter of last year, driven by increased room activity and higher pricing. As Dan noted earlier, Venue's performance has remained stable, which is a testament to the strong recurring demand for our virtual data room platform, as well as our sales execution. Adjusted EBITDA margin for the segment was 25.6%, an increase of approximately 310 basis points from the third quarter of 2022, primarily due to higher sales and cost control initiatives, partially offset by incremental investments in technology development. Net sales in our Capital Markets Compliance and Communications Management segment were $70.1 million, a decrease of 16% on an organic basis from the third quarter of 2022, primarily driven by lower capital markets transactional activity. As we anticipated, the level of capital markets transactional activity in the third quarter improved modestly from the second quarter, and remain well below last year's level, albeit at a lower rate of decline than we experienced in the first half of the year. While the outlook for capital markets transactional environment is uncertain, including negative impacts stemming from a potential government shutdown, DFIN remains very well-positioned to capture a significant share of future demand for transaction related products and services, when market activity picks up. Capital Markets Compliance revenue was down $4.4 million or approximately 17% versus the third quarter of 2022. While our Capital Markets Compliance offering, which supports our corporate clients with their ongoing compliance needs is mostly recurring in nature, a component of it is event-driven, including certain 8-K filings and special proxies which can fluctuate from period-to-period. This year's third quarter net sales decline was driven by a lower volume of event driven special proxies as well as timing shifts of certain client filings, which were completed and recognized in the third quarter last year, but were completed and recognized in the second quarter this year. Adjusted EBITDA margin for the segment was 37.9%, an increase of approximately 730 basis points from the third quarter of 2022. The increase in adjusted EBITDA margin was primarily due to cost control initiatives, partially offset by lower sales volumes and higher bad debt expense. Net sales in our Investment Company Software Solutions segment were $26.7 million, an increase of 12.7% or 11.4% on an organic basis versus third quarter of 2022, primarily driven by growth in subscription revenue as a result of the continued strong adoption of Arc Suite within investment companies. In addition to the subscription revenue growth, we realized higher services and support revenue in the third quarter related to a regulatory-driven filing in the EU that was one-time in nature. We expect a more normalized growth rate in the fourth quarter. We are encouraged by the performance of Arc Suite in the third quarter and remain well-positioned to capture opportunities from regulations, such as tailored shareholder reports to drive future recurring revenue growth. Adjusted EBITDA margin for the segment was 37.1%, an increase of approximately 760 basis points from the third quarter of 2022. The increase in adjusted EBITDA margin was primarily due to operating leverage on the increase in sales and cost control initiatives, partially offset by higher product development and technology investments, in support of growth opportunities. Net sales in our Investment Company Compliance and Communications Management segment were $36.7 million, an increase of 2.2% from the third quarter of 2022, driven by higher transactional revenue, primarily related to a large mutual fund special proxy project. Adjusted EBITDA margin for the segment was 34.1%, approximately 40 basis points higher than the third quarter of 2022. The increase in adjusted EBITDA margin was primarily due to the impact of cost control initiatives, including continued synergies from our Print platform consolidation and higher sales volumes. Non-GAAP unallocated corporate expenses were $11.5 million in the quarter, an increase of $1.9 million from the third quarter of 2022, primarily driven by an increase in expenses aimed at accelerating our transformation, partially offset by the impact of cost control initiatives. Free cash flow in the quarter was $61.3 million, a decrease of $7.4 million compared to the third quarter of 2022. A year-over-year decline in free cash flow is driven by higher capital expenditures related to investments in our software products and underlying technology to support them and higher restructuring and interest payments, partially offset by an increase in adjusted EBITDA. We ended the quarter with $165.9 million of total debt and $154.2 million of non-GAAP net debt including $41.5 million drawn on a revolver, down from $95.5 million drawn at the end of the second quarter. From a liquidity perspective, we had access to the remaining $257.5 million of our revolver as well as $11.7 million of cash on hand. As of September 30, 2023, our non-GAAP net leverage ratio was 0.8x. As a reminder, our cash flow is historically seasonal, generating more than all of our free cash flow in the second half of the year. Regarding capital deployment, we have repurchased approximately 310,000 shares of common stock during the quarter for $14.8 million at an average price of $47.77 per share. Year-to-date through September 30, we have repurchased approximately 387,000 shares for $18 million at an average price of $46.53 per share. As of September 30, 2023, we had $106.3 million remaining on our $150 million stock repurchase authorization. Going forward, we will continue to take a balanced approach toward capital deployment. We continue to view organic investments to drive our transformation, share repurchases and net debt reduction, each as key components of our capital deployment strategy and will remain disciplined in this area. As it relates to our outlook for the fourth quarter of 2023, we expect continued softness in the capital markets transactions environment, due to macroeconomic headwinds and geopolitical factors. We expect consolidated fourth quarter net sales in the range of $160 million to $180 million, and adjusted EBITDA margin in the mid-20% range. Compared to the fourth quarter of last year, the midpoint of our consolidated revenue guidance $170 million implies a very modest year-over-year increase in net sales. I will also provide a bit more color on our assumptions for the Capital Markets Compliance and Communications Management segment. At the midpoint of our sales range, we assume transactional sales of approximately $50 million. In addition, and related to my earlier comments regarding the impact of the transactional environment on certain compliance filings, most notably, special proxies and 8-Ks, our fourth quarter estimate assumes a modest year-over-year decline in our compliance-based sales within this segment. With that, I will now pass it back to Dan.

Thanks, Dave. The execution of our strategy continues to deliver positive results and further demonstrates DFIN's ability to perform well in varying market conditions. While the outlook for the capital markets transactions market remains uncertain, our solid financial profile provides us with the foundation to continue to execute our strategic transformation. Our focus remains on accelerating our business mix shift by continuing to grow our recurring revenue base, while maintaining market share elsewhere. We will continue to invest in our Compliance Software platform and capitalize on regulatory tailwinds created by regulations, such as tailored shareholder reports, ESG and the Financial Data Transparency Act. In addition, we will continue to aggressively manage our costs and drive operational efficiencies, while maintaining our historical discipline in the allocation of capital. We are in the midst of preparing our 2024 operating plan and extending our long-range plan through 2028. In 2024, we expect to realize additional benefits from new regulations, continued operational transformation and the execution of our strategy, yet expect continued uncertainty in the capital markets transactional environment, driven by broader macroeconomic headwinds. Through the planning period, we expect continued progress in delivering higher value for our clients, employees and shareholders. Consistent with past practice, we expect to provide an update on 2024 and our long-range projections in February. Before we open it up for Q&A, I would 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. Now with that, operator, we are ready for questions.

[Operator Instructions]. Our first question comes from the line of Charlie Strauzer with CJS Securities Inc.

Just a lot of talk about boosting recurring revenue and really appreciate that avenue. If you will, maybe we can talk a little bit more and provide a little bit more color there, about the efforts to drive your sales mix more choice of recurring revenue.

Let me start and then Dave, see if you have any additional comments. So, we started the nature of the business and the markets we serve, or we serve rather, they are characterized by recurring demand. And that's in both Software offerings as well as tech-enabled solutions. And the recurring demand obviously drives performance predictability. And then in addition, we also serve the corporate transactions market, which of course, is event-driven, but really attractive financially and an important offering to serve our clients. And then something like Venue sits in the middle, where its performance has been more predictable or consistent than the broader or than our transactions business, because of its breadth of the markets it serves and the diligence process that it serves. And so if we look back, really since the spin our investment and planning has been geared towards expanding the recurring predictable offerings, and that includes serving new regulations, new disclosures, looking for new use cases to support our client's compliance needs. We do have some areas of our business and at least in our reporting that include a of predictable, as well as more event-driven demand. And Dave can take you through some of that. Overtime, we will have more disclosure in splitting that out to help get a clearer view of their various pieces. Dave?

So as Dan noted, we do provide the detailed breakout of our sales by product in the investor presentation. I think, from that data, you can get a pretty good sense, the vast majority of what we call compliance sales, in both of the Compliance and Communication Management segment would fit that bucket, all of the or the vast majority, I should say, of the investment company software. And then when you go to the capital market software, things like active disclosure, File 16, all recurring in nature. And we touched on it in the prepared remarks, and Dan just comment on it that, there is a component of what we call compliance that is really event-driven, things like special proxies, et cetera. And so we will be breaking that detail out in the future. And then I think, again, we touched on it in the prepared remarks and Dan comment on it here. When you look at something like Venue, while the primary use case for Venue is M&A, Venues tend to be much, much more consistent than certainly M&A deals getting completed, the broader M&A market, et cetera. I think when you look at the underlying diligence activity, it just tends to be much more stable regardless of whether deals are getting completed or not.

And just a follow-up there. What does the competitive environment look like today versus maybe pre-pandemic in those kind of recurring software revenues?

I think we have made a lot of improvement over time in our offerings, and I think the expansive nature of our offerings being able to bridge, from software into the service area has been a real differentiator for us and including into the distribution. If you look at something like tailored shareholder reports, and that's going to expand across all three of those offerings. And so I think a combination of what we have been doing internally as well as just the breath of our offering is helpful. That said, competitors aren't standing still either. And so the markets remain competitive as they have always been. But we feel really good about the progress that we have made.

Our next question comes from the line of Pete Heckmann with D. A. Davidson.

I missed some of the call, had some overlapping activity this morning. But one thing I wanted to follow-up on is, talking about the competitive dynamics within compliance piece of the business. Are you seeing much, if there seems to me like, maybe one strong player on the software side, and then a lot of fragmentation of smaller players. I mean, how do you see that shaking out over a intermediate term? Do you see some of those sub-scale players just kind of shaking out and not being able to compete, or maybe the proprietor, the owners aging out of the business. But more importantly, I guess how do you see yourself competing with on the tech side with software feature functionality?

Sure. Let me start and others can jump in. It's going to vary by product and offer. I think for us, we're number 1, 2 or 3 and each of the offerings that we have. And if you look at leadership economics generally flow to number 1, 2 or 3. So that said, like I said in the last comment, there are formidable competitors, but we're happy with the progress that we're making, and we'll continue to invest behind it to make more. Specifically, to your question on folks, businesses going out or owners passing the torch. We're not seeing a lot of different behavior recently. The one thing that we've seen obviously with the raising of or the increase in interest rates and financing having a cost applied to it is, from a valuation standpoint in the broader market both public and private, some of these businesses have been repriced. But for us, we're very comfortable with our strategy. We're focused on executing against it. I think the differentiators I mentioned on the last question is that we've got both the software side of it and we can work with our clients the way in which they want to work. And in the meantime push them along the progression and sometimes ourselves getting pushed along the progression towards. Certainly, more software orientation, but the ability to play in both sides is really helpful for us.

Dan, maybe to build on that with the compliance software. The progress we're making in active disclosure isn't necessarily reflected this quarter. And so, I look at that increased net client count, in Q3, which is the first time we've had a higher client count. And we're excited by what we see on the active disclosure platform, because it's the newest fit for purpose disclosure tool in the market. I'd rather be us than anyone else. So our clients are using active disclosure, for their most important compliance needs. It's delivering. We're building it and have built it on decades of SEC, client success. Very purpose driven price remains a strategic opportunity, for us. So we've been able to achieve higher prices, with built in price, renewals and longer contracts. And our clients are recognizing the value of this better product. They're signing up for multiyear contracts. Our cumulative, average contract length is now 30 months. We are able to price at or below, the market, which gives us an opportunity relative to the competition, who charges expensive add-ons for additional modules that can accomplish what active disclosure does. So you can buy what you want here, not being forced to pay for other modules with multiple contracts. With the decommissioning of 83 done, we're totally focused on the competition, on net new logos. We're bringing more opportunities into our funnels, and we're really encouraged by the metrics, that we see in our pipeline for future growth.

Our next question comes from the line of Sam Salvas with Needham & Company.

I'm on for Kyle today. Thanks for taking the questions here. Can you guys just talk a bit more about what you're seeing in terms of capital markets trends and maybe how those progressed throughout the quarter?

Sure. This is Craig. Thank you for the question. I think if you look at, the IPO market first, I said last time that the IPO market recovery is not going to be a straight line. And we certainly saw that in Q3 and it continues in October. So we had some big IPOs in Q3. We had ARM, which raised 63% of the quarterly proceeds in Q3. We also had Instacart and Klaviyo. Those haven't always been well received in the marketplace. So from a file perspective, in the quarter, we had 12 filings greater than $50 million. The remaining filings which were 42, we're nano microchip, micro cap companies. So it speaks to the new ways in the IPO market, and the really small deals that are out there. We had 10 IPOs that priced in the quarter, raising more than $50 million. Six of those took place in the last couple weeks of the quarter. Two of the 7 companies who raised 100 million are trading above their IPO price. So the pipeline for the companies filed certainly is nice, we had 22 in the market publicly filed, defense working with 14 of those. And it doesn't include companies that have filed confidentially. So certainly you've seen the market, there's a little dampened enthusiasm. And the resurgence in IPOs is going to depend on how these IPOs do. But there's still a solid pipeline of companies, we think are waiting for the late first quarter, second quarter of 2024, assuming we had some stability and interest rates, the economy, geopolitical situations. Carve outs have been a success. So we've had continued bright spot of companies carving out IPOs. So we had catalogs, which we worked with in the quarter, which was a nice IPO. And there's a strong pipeline. So there's about six major spends that are working. We're working with almost all of them, which is really terrific. And then as I move to M&A, certainly the quarter was not very exciting, as we referenced in the remarks, deals down 35%. But a bright note in October which has seen monthly M&A volume, be the greatest in over four years. So certainly, the busiest month, that we've had in quite some time. These deals are obviously going to take place for a while and for us the 2024 events. But what does this all mean? The history has demonstrated that the deal market can change very quickly. It only takes a few, well received listings to change sentiment. And we think as business normalizes, DFIN is going to deliver our strong mix of high profile, high profit M&A, IPO, private equity, de-SPACs. And more importantly, back to the software question, these transactional deals are pipeline for recurring software subscription revenue, because we support our clients and their ongoing reporting needs. So we think we are performing better than the market from a transactional perspective. We think engagement is high, underlying activity is high, and it will result in recurring software. So Dave, I don't know if you want to add to that.

I think I would just say a couple things, to put it into context, relative to 2021, where the transactional business was just north of $400 million in sales. Like, when you look on a trailing four quarter basis now, we are well under half of that, I think, about a $190 million or so. To Craig's point, when you look at how this year has started to slowly recover and you go quarter-by-quarter, from $41 million in Q1 to $46 million in Q2, $49 million this quarter. And like we said in the in the guidance, assuming $50 million for the fourth quarter. So still in the $180 million range for the year is well off the high watermark that we saw in 2021.

And then just wanted to touch on the gross margin strength this quarter. Those came in really impressive. Could you guys just talk about some of the drivers behind the expansion there, and how we should think about those going forward too maybe?

I think, look, it is more of the same, right, as we as we continue to shift the mix towards software. The incremental margins, the operating leverage you get on that offering is very, very high. I think also -- and it has been part of our DNA when you look really since the spin, really doing a tremendous job on managing the cost structure. And we have referenced in in some of the product offerings, where we are recognizing some price increases, et cetera. So all those factors contribute to not only the high gross margin, but EBITDA margin at 27% in the quarter, really, really strong, especially in the soft capital markets transactional environment.

Our next question comes from the line of Raj Sharma with B. Riley.

Thank you for taking my questions. Solid quarter. I just had a couple of questions on the compliance transactions are lower in Q3. Is the decline all due to seasonality? I see that, there were one-off proxies. And is that impact to continue? Could you add more color to that, please?

Yes, Raj. And we noted it in the prepared remarks, right? And I assume you are about the Capital Markets Compliance and Communications Management segment and the revenue that we call, compliance there. There's absolutely part of it is seasonal, so you would see the normal seasonality with Q2 typically being the peak. We did note in the prepared remarks that when you look at the comparisons on a year-over-year basis and obviously the seasonality is similar between years. The other factors that contributed to it were the fact that there were a few, proxies and kind of the recurring proxy work that were filed in Q3 of 2022 and those same companies filed in Q2 of 2023. So we did get a little bit of a pickup in Q2 and then you see that flipping back the other way here in Q3. And then in addition, there are also some special proxies, which are more event driven, that occurred in the third quarter of 2022, and we didn't have the level of activity associated with that type of work in the third quarter this year.

And then just a question on the tailored shareholder reports. The impact or sort of the need for the services going forward in terms of the need for print output is seemingly, is different from the 33 requirements. So, if more print, output is needed for TSR. Does that raise costs and reduce margins or how do you sort of handle that now that a lot of the print has been rationalized and outsourced?

So it's a great question, Raj, and I'll comment and Eric jump in, with some more details. So you're right that the way the regulation is currently that output will be part of, what's required and will be part of our revenue stream there. We've talked in the past that we're seeing, we expect to see not only print, but also traditional services, as well as software. Specific to your question on the cost structure and how it affects us. As you know, we've done a really, really good job. And to the earlier question on gross margin, we've consolidated our manufacturing facility down to a single digital print location. We outsource all of our offset printing. And so when you think about those 2 components, the off SPAC printing, it's effectively a fully variable model. And so no impact on our cost structure other than outsourcing that work when we have the revenue and the work that we need to produce it. And on the digital equipment, a little bit of a different model there. As you've seen, our margins have gone up over time, just given the mix and how we're managing both the digital print platform as well as how we're treating the outsourcing. And so the short answer is no change to the cost structure. There's obviously some variable costs that come along with the incremental revenue, but we feel really good about kind of the dynamics there and how we're positioned to serve that market and really drive solid margins going forward regardless if it's digital print or offset print. Eric, anything to add on the regulation?

Thanks, Dave. And Raj, just building on Dave's comments. If you think of an annual report, much, much larger document. The tailored shareholder report is a much smaller page count. So, it's a great fit for our digital platform. So while the number of share classes increases, the number of pages actually distributed decreases. So, again, that fits our platform extremely well. But I think key to your question, and maybe to expand a bit on it, is this regulation, is a mix of a broad spectrum of services, which fit deep in extremely well. A lot of discussion around the tagging in the iXBRL, there's creation of the share class reports, and that can be done in our software as well as our tech enabled solutions, the tagging and then the filing. But I think where you were going with your question was around the downstream impact. So, they're beyond the digital print requirements. Those share class reports have to be web hosted and distributed and distributed electronically delivered. And there's an ADA element to all this where, that's a value add that deep and provides from our solutions, both tech enabled and software, to help our clients meet this demand across the spectrum. So, certainly, it drives digital printing activity, but it does drive a lot more services across our spectrum of solutions. And then not only is a fund asset manager type impact, there's also the insurance investment side of this, which has impacted significantly on the distribution side. While the mutual funds and the share class requirements are significant, the investment insurance side of the business also has to comply with the TSR regulation. So, there's a big impact there as well, very complex ecosystem, and our clients are coming to DFIN to manage that. Dan had mentioned earlier, we had a press release earlier in October to talk about our alpha release. And, in that release, I think it's important to note that our solution has a straight through processing element that enables the financial report and the TSR to be strongly linked, eliminating any need for post production reconciliation. The dynamic output templates allowing great deal of flexibility and output, and that ultimately then drives the distribution and output. And then all this then managed by an enhanced dashboard experience, giving our clients a full view of where their TSRs stand from production the whole way through distribution.

And then just one last question on related to the tailored shareholder reports and the SEC requirements mandate that are coming. So, they will drive higher revenues for software revenue growth, but there is a, when you say to go from the current year-on-year growth rates doubling, you talked about software doubling by fiscal 2026. Correct me if I'm mistaken on that. That is a pretty significant jump from where software has grown in the last let's say a year? And can you talk a little bit about that? How to understand that jump in growth rates, going forward.

Raj, I am happy to take that one. And so, I think, to your point, you look at the historical growth rates. And if you just run those out, you may get a different answer. I think when you look at, some of the new regulations coming into play like TSR, we have talked about our single compliance platform with the potential to address new regulations. I also think there is an aspect of certain parts of the business that, today, we work through traditional services, that overtime will continue to migrate more toward a software offering or a hybrid software offering. And so, like we said, we are in the midst of extending out our long-range projections, and we will share more in February as we typically do. But those are just some of the highlights of how we are thinking about the overall mix of revenue going forward.

There are no further questions at this time. I would now like to turn the call over to Dan Leib for closing remarks.

Thank you. And thank you, everyone, for joining us. We look forward to speaking again on our Q4 call in February and prior to that at some investor conferences. So thank you again.