Adopting SaaS Model Will Increase Revenue Stability

Key Takeaways

• Transition to a software-focused model enhances recurring revenue streams, improving revenue stability and growth through SaaS offerings.
  
• Shifting from printing to higher-margin software solutions boosts operational efficiencies, positively impacting net margins and profitability.
  
• Declining print demand, soft capital markets, and increased costs challenge revenue growth and margins, impacting net sales and strategic cash allocation.

Catalysts

Provides innovative software and technology-enabled financial regulatory and compliance solutions in the United States, Asia, Europe, Canada, and internationally.

• The transition towards a software-focused business model, with SaaS offerings now representing the largest portion of sales, is anticipated to drive higher recurring revenue streams, increasing overall revenue stability and growth.
  
• The strong growth of specific software solutions, such as Venue and recurring compliance software products like Arc Suite and ActiveDisclosure, is expected to contribute to revenue growth and potentially improve net margins due to their higher margin nature.
  
• The Tailored Shareholder Reports solution is projected to generate $11 million to $12 million in additional recurring software revenue, half of which is expected to be recognized in 2024, boosting both revenue and net earnings.
  
• The company is benefiting from operational efficiencies, reflected in improved gross margins driven by a favorable sales mix featuring higher-margin software solutions, which is likely to enhance net margins and profitability.
  
• The potential decline in demand for printing and distribution services due to regulatory changes could improve overall profitability as the company shifts towards higher-margin software solutions, positively impacting net margins and earnings.

Donnelley Financial Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Donnelley Financial Solutions's revenue will grow by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.1% today to 13.3% in 3 years time.
• Analysts expect earnings to reach $118.1 million (and earnings per share of $3.97) by about December 2027, up from $96.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.5x on those 2027 earnings, up from 18.7x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.4x.
• Analysts expect the number of shares outstanding to grow by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.99%, as per the Simply Wall St company report.

Donnelley Financial Solutions Future Earnings Per Share Growth

Risks

• The reduction in print and distribution revenue, driven by the long-term secular decline in demand for printed materials and the Tailored Shareholder Reports regulation, continues to adversely impact overall revenue growth.
  
• The soft capital markets transactional environment led to an 8% reduction in transactional revenue, indicating a challenge in achieving higher net sales from this sector.
  
• Lower capital markets transactional revenue was influenced by fewer IPOs raising significant capital and subdued M&A activities, affecting potential revenue from these sources.
  
• Higher compensation-related accruals and related expenses impacted EBITDA, indicating potential pressures on future net margins if these costs persist or increase.
  
• The execution of a pension plan termination may require additional cash contributions, potentially reducing free cash flow availability for use in other strategic areas.

Valuation

• The analysts have a consensus price target of $75.0 for Donnelley Financial Solutions based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $885.6 million, earnings will come to $118.1 million, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of $62.58, the analyst's price target of $75.0 is 16.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.