Donnelley Financial Solutions, Inc. (DFIN) CEO Daniel N. Leib on Q1 2022 Results - Earnings Call Transcript

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Donnelley Financial Solutions, Inc. (NYSE:DFIN) Q1 2022 Earnings Conference Call May 5, 2022 9:00 AM ET

Company Participants

Daniel N. Leib – President and Chief Executive Officer

Craig Clay – President of Global Capital Markets

Eric Johnson – President of Global Investment Companies

David Gardella – Chief Financial Officer

Michael Zhao – Head of Investor Relations

Conference Call Participants

Stefanos Crist – CJS Securities

Peter Heckmann – D.A. Davidson

Raj Sharma – B. Riley

Operator

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.

Michael Zhao

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.

Daniel N. Leib

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, well continuing to aggressively manage our cost structure and being 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 imagined 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 year 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 strong first quarter driven by regulatory change, we continue to see increased adoption of our Total Compliance Management offering. A component of our digital albeit 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, 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'm 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 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 the 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, such as updating their filing 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 a is likely to remain more resilient. I am confident 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 plan, 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 multiyear 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, reflective of our improved sales mix.

Our ability to operate at a higher level of profitability across varying points in the markets 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 a header 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 in 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 at 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 ever succeeding our 44 in 24 goal of targeting 44% of our sales from Software solution by the year 2024. 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, deepen as 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 5 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. Dave.

David Gardella

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 to slow down 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-in 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 dollars, a $2million 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 in transactional sales. Illustrate this in more detail in the first quarter this year on a similar level of transactional sales and slightly lowered level of overall sales compared in 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 fix costs across the business and to variabilize our cost structure in specific areas and 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, they 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 across controls. In the near-term, we will continue to incur costs associated with supporting both the AD3 and new AD platforms reflect a materially complete that 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 and 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 across 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-savings initiatives.

As both Dan and I point out at earlier, DFIN is now fundamentally more profitable compared to historical quarters with similar level of overall sales and transactional activity. This is particularly noticeable in the Capital Markets Compliance and Communications Management segment were 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 segments 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 1100 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 SPAC looking for acquisitions. Our industry leading portfolio of solutions dedicated to our clients, private to public journey, physicians 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 the De-SPAC activity. The proposed legislation is aimed at increasing disclosure and investor protections, potentially changing how SPAC 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, our 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 and 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 1100 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 on 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 was 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 expense 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 variabilizes cross 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 dollars, $10 million of which was 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 in the first quarter of last year.

The decrease in unallocated corporate costs was primarily due to lower incentive compensation expense and the impact of ongoing cost control initiatives. Free cash flow in the quarter was -$62.1, $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 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 31st 2022, our non-GAAP net leverage ratio was 0.7 times down to 0.3 times from the first quarter last year. As a reminder, our cash flow is historically seasonal. We are user-cash in the first quarter, bolstered a 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 evolved 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 amount 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 on all capital deployment. As it relates to our outlook for the second quarter of 2022, we expect continued market volatility, driven by aggressive fad action 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 price IPOs and SPAC 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 deal makers might be cautious, the fundamental drivers of deal-making remains. 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 markets stability returns. In addition, we expect sales from print and distribution to continue to decline, but with minimal impact to non-GAAP adjusted EBITDA. Given the historical seasonality of print in distribution sales, the second quarter will improve this year 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 first quarter margin. And once again, much stronger than historical quarters of light size, total, and transactional sales.

As Dan noted earlier, while the outlook for capital markets transaction environment remains uncertain, the pace of activity can change very quickly based on our market leadership DFIN is very well positioned to capture a significant share of future demand for transactions 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, our proof point's 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 stockholders. We will accomplish this through focusing on 3 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 3 value-creation levers. We believe we had 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 will 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, [Indiscernible] 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 a consolidated sales growth in the low single-digits between 2022 and 2026. Regarding margins, the combination of an evolving revenue mix, impact of permitting cost reductions and 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 a 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 dollars to areas that best advance our strategy and increase shareholder value. The fluctuations in capital markets transactional environment over the last several quarters has demonstrated the importance of the delivered 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 the 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 stage 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 $150 million share repurchase authorization that expires December 31, 2023 and we had $123 million remaining on that authorization as of March 31st. 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.

And lastly, review dividends as the last priority for use of some cash at this time. Also 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. Dan?

Daniel N. Leib

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 deepened 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.

Question-and-Answer Session

Operator

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

Stefanos Crist

Hey, good morning, it is Stefanos Crist calling in for Charlie.

Daniel N. Leib

Hi Stefanie.

Stefanos Crist

Can you give us a little more color on just your efforts to try and improve and maintain margins despite lower volumes?

David Gardella

Yes. This is Dave, I'll take that one and then Dan, if you want to jump in. Appreciate the question. We hit on this a few times in the prepared remarks. But certainly worth spending a little more time on. When you look at our first quarter margin that was 24.2%, certainly we recognize the decline from last year's first quarter. This year's first quarter had only half the amount of capital markets transactions revenue. And as we've talked about in the past, this revenue typically carries a very high incremental -- or in this quarter's case, decremental margin. When you look back at the like-sized quarters in terms of both transactional revenue and total revenue and as we pointed out Q1 of '19 and '20 are great examples of this, our EBITDA margin now is substantially higher compared to those quarters that I just mentioned over 1,000 basis points higher than the first quarter of 2020, 1,300 basis points higher than the first quarter of 2019.

I think more specific to your question, we've made permanent changes to the cost structure and that's everything from headcount reductions to shrinking our real estate footprint, to outsourcing 100% of our offset print, shutting that fixed costs than our operations team has really done an outstanding job managing that transition at the same time also continuing to run the digital production very efficiently. The important part here is that these changes, the headcount, the real estate footprint, shrinking, these are permanent changes and we certainly saw the margin improvement trending up over the last several quarters and I think first quarters are another proof point of that. And then lastly, I would say in addition to the cost benefits, we've also shed more than a $100 million dollars of print revenue over the last five quarters.

As we've said in the past the print revenue carries lower margins in many cases, much lower than our average. And so when you look at this factors combined, we are really set up to deliver ongoing margin improvement. And when we updated the guidance this morning, we commented on it earlier. We believe that will be approaching 30% EBITDA margin by 2026.

Stefanos Crist

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

Daniel N. Leib

Yeah, sure. So this is Dan, I'll start and then others can jump in as well. We have a varied product offerings, so we have very strong compliance offering, which is both within the corporate space, predominantly ActiveDisclosure. And then in the funds space Arc Suite. And so we have different competitors there. And there's quite a few that we run into in any space. I think what we've been able and where we've been able to be 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 [Indiscernible] side and similarly on the fund space. We've built--purpose built tools to serve the unique needs of the fund alternative investments insurance companies. And we look at all the competitors there.

We feel really good about our product portfolio and what we have currently in development in the progress we're making. When we go to the Venue Data Room. Again, different competitors, but a lot of different competitors. We are more leverage to the M&A market. So as we saw last year, had a near 50% growth through the year. This year, we performed much better than the primary use case of M&A. We see the other participants ' great visibility. There was only one of size, other one that's public, but again, feel really good about how that product's performing given that use-case and then given what we see in the broader environment. So let me see if anyone else wants to add to that.

Craig Clay

Sure. Dan, this is Craig. As Dave said, we remain bullish on software. So I'll start where Dan left off, which is Venue. It showed good performance in Q1, significantly better than it's used 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 securities to protection of our client's personal identifiable information, contract review. It's all 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, client relationships, and we will be there to fight and to win. On ActiveDisclosure, 29% growth competitively, what we're seeing is that we're still at the center of this regulatory corporate and compliance governance place and we had a trust of our clients. When you look at our new ActiveDisclosure, it is in the market, it is winning. So our clients are choosing as built from the ground up purpose-built the newest technology. And these client takeaways demonstrate the market once what we have built.

Eric Johnson

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're they only disclosure tool available on their network and so we're getting all Oracle NetSuite clients, power in the confidence of ActiveDisclosure. I feel really good about our place competitively. And I'll pause here if anyone --

Craig Clay

Go ahead, Eric.

Eric Johnson

Yeah. Thanks, Craig. Dan from related question on the Arc Suite front for GIC where we offer an end-to-end regulatory compliance software solution for the middle and back-office related to financial and regulatory reporting. We see competition generally in the regulatory side of things with traditional competitors. And then as we expand the Arc Suite has four key pillars and those products have different subsets of solutions that line us up differently on a competitive basis. And we see generally tech-oriented firms as well as traditional filing firms in this case.

Daniel N. Leib

Yes. Thanks, Eric. The last thing I'll say just the bookend my comments is that, if you look over the last five years, we doubled our software revenue. So last year, $270 million or so. When you look forward five years, we're planning to do that again from our updated guidance or your over $500 million of software revenue, predominantly, it's recurring in nature. So it offers that base of predictable recurring revenue from which to grow that further. So feel good about what we have in the market today. Feel good about what we have in the pipeline.

Eric Johnson

Alright, thank you.

Daniel N. Leib

Thank you.

Operator

Your next question comes from the line of Peter Heckmann with D.A. Davidson. Your line is now open.

Peter Heckmann

Good morning, everyone. Thanks for taking the questions.

Daniel N. Leib

Morning.

Peter Heckmann

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?

Daniel N. Leib

Substantially by the beginning of 2023.

Peter Heckmann

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 the 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 getting share or maybe just thinking maybe the data doesn't totally correlate with your revenue in that business?

Daniel N. Leib

Yes. We do think we're gaining -- continue to gain share. We think we gained share last year as well, particularly given our product being more leverage to M&A. To your point, those statistics, probably the best we have, there's 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.

Peter Heckmann

Great. And then last one. I think I saw somewhere in the release, did you -- in the cash flow statement. Just a little bit of a higher provision for that, I assume that relates to some of the ongoing SPAC IPOs in the pipeline. Can you talk about your exposure there in terms of work you've done that you've built for? But I know sometimes backs can -- don't get done, may not be as good as that is as some other customers.

Daniel N. Leib

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

Peter Heckmann

Okay. I think that's I had I appreciate it.

Daniel N. Leib

Thanks.

Operator

[Operator Instructions] Your next question comes from the line of Raj with B. Riley. Your line is now open.

Raj Sharma

Hi. Thank you for taking my question. I wanted you to clarify, just following up on software and growth on the software segment and the growth in -- and so you say you're going to double in the air in 5 years. Can you talk a little bit about where is this growth coming from in terms of penetration amongst clients? Are you gaining share in typically any of this software growth happening, is it accountabilizing any of your Tech-enabled sort of services at these corporates?

Daniel N. Leib

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

David Gardella

Go ahead Dan.

Daniel N. Leib

Yeah. So I'll start. So looking at it via splitting compliance from transition, as they mentioned in the prepared comments, the transactional always a little harder to project, a little more volatility, but the growth there is projected to be slower than what we see on the compliance side. The compliance side would have a little bit of cannibalization, but not -- that's not the main driver. The main driver is we rolled out new ActiveDisclosure just about a year ago or so, we rolled out new offerings within our GIC platform, and then we've been adding -- or our Investment Companies platform, we've been adding new capabilities as well, and we see existing share of wallet opportunities. We commented on seeing price lift. We commented on seeing additional term lift, as well.

And with the new products that we have in market, the reception that we're getting from our clients and from new potential clients, that's what really underpins it. I would say when we look at the individual markets that we play in, there is some share take there, but nothing inconsistent with what we've experienced since we've had those products in market. Sorry, Dave, I don't know if you wanted to add?

Raj Sharma

Dan, you covered the same points I was going to make. Thanks.

Daniel N. Leib

Okay, thanks.

Raj Sharma

Thank you. So next 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.

David Gardella

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

Raj Sharma

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

Daniel N. Leib

Yes, probably a little bit -- little bit greater.

Raj Sharma

And then on the capital markets, I understand it's obviously, an episodic business, it depends upon the capital markets transactions, can you get too tough to guide to -- you think the transactions first half or this year are going to be down the volume and is going to be down 30%. Or in this year, or is it just too tough to call it.

David Gardella

The short answer is yes, that it's too tough to call it. I think the longer answer is, and I would point back to some of the things we said in our prepared remarks. I think 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 on the activity under the water that we don't -- that the public may not have a great view towards. We're encouraged by that. I think typically in a down-market, you may not have all the underlying activity. I think the down-market -- the current down-market that we're in is a little bit different, just given some of the latent demand that we see based on this activity and again, supported by what we're hearing from third-parties as well.

Daniel N. Leib

I guess. Dave, sorry to interrupt, Raj within the any market we continue to perform. And this one included. So we have strong market share across the board or performance in Q1 outpaces the market due to strong share and really mix of high profile -- 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 with [Indiscernible] or financial crisis, where everything ended, our clients are still here. There's still working. We have a quality large deals which is where the fan outperforms. So in Q1 and in April of deals IPOs with greater 100 million, [Indiscernible].

We have all 5 of the top LDOs. We have the largest De-SPACs. We have strong sharing M&A. So we're continuing to perform in this market and more performing whatever market we're given. And again, real story here is the link back of all of that to our software. So our clients are using Venue and are doing deals, are continuing to use ActiveDisclosure's as their report. So it's the ecosystem of a complete process that we are delivering for GRC to our clients.

Raj Sharma

Well, I guess in the Q2 guidance, I thought being and 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?

David Gardella

I think it's generally pretty similar.

Raj Sharma

Got it. Okay. Thank you for taking my questions. I'll take the software. Thank you.

Daniel N. Leib

Thank you. Raj.

Operator

At this time, there are no further questions. I'll turn the call back to you, Mr. Daniel N. Leib .

Daniel N. Leib

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.

Operator

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

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