Richard Sosa sees value in DFIN's niche

Episode Summary

Executive Summary: The episode centers on Donnelley Financial Solutions (DFIN) as a misunderstood, post-spin business benefiting from capital markets activity, especially SPACs and IPOs. Richard Sosa argues the real story is DFIN’s shift from declining print toward higher-margin software, strong cash generation, and disciplined capital allocation, while noting risks around cyclicality, disclosure complexity, and management incentives.

Main Topics: DFIN business overview and spin-off history (Priority: 5/5): Richard explains DFIN’s origin inside RR Donnelley, the eventual breakup of a debt-laden, underinvested conglomerate, and why the spin left DFIN looking like a broken print business before its transformation became visible. Shift from print to software (Priority: 5/5): The key thesis is that DFIN intentionally reduced low-growth print exposure and reinvested into software, improving margins and making the business more durable and valuable over time. Capital markets exposure and SPAC/IPO boom (Priority: 5/5): DFIN’s filing, compliance, printing, and transaction services benefit from IPOs, SPAC de-SPACs, M&A, and other capital-markets events, creating a powerful near-term tailwind. Moat, stickiness, and market share (Priority: 4/5): The company’s regulatory filing and transaction workflows are sticky because clients rely on DFIN’s integrated platform, and the firm has been regaining share from rivals like Workiva in active disclosure. Valuation and sum-of-the-parts debate (Priority: 4/5): Despite a strong re-rating, DFIN still trades at a low EBITDA multiple. Richard argues the market underappreciates software growth, recurring cash flow, and the optionality of capital allocation. Capital allocation and shareholder alignment (Priority: 4/5): A major discussion point is management’s credibility: buying back stock, repurchasing debt at a discount, avoiding large acquisitions, and operating with an active shareholder on the board. Risks and endgame scenarios (Priority: 3/5): The hosts discuss cyclicality in IPO/SPAC volumes, lack of perfect disclosure, and whether DFIN ends up as a compounder, levered buyback story, or acquisition target.

Key Arguments: DFIN is not just a print company; it is increasingly a software-enabled capital markets infrastructure business. The spin-off from RR Donnelley mattered because the old parent underinvested in the business and siphoned cash away. Management’s decision to shrink print and reinvest in software was unusual but strategically sound. The company’s exposure to IPOs, M&A, and SPAC de-SPAC transactions provides upside in hot capital markets. Even if transaction activity slows, DFIN still has substantial cash flow and a more software-heavy mix than the market assumes. The SEC filing/annual reporting workflow is sticky, making recurring revenue more durable than headline transaction volume suggests. DFIN’s active disclosure products are taking share from Workiva and could become a more important long-term growth driver. Debt repurchases at a discount and share buybacks show management is allocating capital in a shareholder-friendly way. The market is likely over-focusing on SPAC/IPO boom earnings and underappreciating the ongoing software transition and cash generation. Potential endgames include continued compounder status, levered buybacks, or a sale to a strategic/PE buyer, though a transformational acquisition is viewed skeptically.

Data Points: Ticker: DFIN - Donnelley Financial Solutions, the stock under discussion Revenue (historical at spin): About $1 billion - Company revenue around the 2016 spin-off period EBITDA margin (historical at spin): 15% - Approximate margin when DFIN spun out from RR Donnelley Net debt (at spin): $600 million - Richard said the business carried about this amount of net debt Interest rate on debt (at spin): About 6.5% - Combined interest burden on DFIN’s debt Print mix (2017): 40% of sales - Richard said print was 40% of business then Print mix (current): About 20% of sales - Print exposure has declined materially since 2017 Investment management revenue loss: $130 million - Regulatory change reduced the need for printed statements Share of business affected by regulatory change: >10% of sales - Richard framed the $130 million hit against roughly $1 billion of revenue Current revenue: About $900 million to $1 billion - Rough size of current annual sales discussed Free cash flow outlook: $800 million over 4–5 years - Richard cited management/analysis implying strong cumulative cash generation Alternative free cash flow base case: $500 million - Richard noted a lower but still very large base case EBITDA margin now: >30% - Business margin improved substantially after the transformation EBITDA margin floor/pullback case: 25% - Richard argued margins should remain strong even if activity normalizes CEO ownership: About 300,000 shares - Discussed in the incentives section; worth roughly $15 million at current prices CEO compensation: About $4 million per year - Raised as part of the management alignment discussion Activist stake: 10% - Simcoe Capital/Jeff Jakobowitz stake in DFIN Activist shares: 3.3 million shares - Richard said Jakobowitz owned about this amount Software target: 44% by 2024 - Management’s stated long-term software mix goal Capital markets growth guidance: 1% to 2% - Management’s long-term view cited by Richard Software growth guidance: 15% to 25% - Management’s stated software growth expectation Market share on capital markets side: 65% to 70% - Richard estimated DFIN’s share in issuer services Biotech IPO filing market share: >95% - Richard cited especially strong share in biotech IPO filings Large IPO economics: $2 million to $3 million in sales - Estimated revenue per major IPO transaction SPAC filing fee: About $25,000 - Richard said the initial SPAC filing itself is low revenue Stock price at one point: $25 - Richard referenced early pitch pricing before the run-up Stock price target mentioned by others: $50 - A past bull case discussed in the conversation Valuation: About 7x EBITDA - Richard and Andrew discussed the stock trading at a low multiple despite growth Sell-side target valuation: 6x EBITDA this year / 5x next year - B Riley’s framing was referenced as conservative but illustrative Recent rally: 3x in about 10 months / 25% in 15 days - The stock had already rerated significantly during the discussion SPAC volume: Almost 500 SPAC IPOs this year - Used to highlight the exceptional transaction environment Active disclosure growth: 35% in Q3 - Richard cited this as evidence of software momentum Competitor growth: 30% in Q3 - Workiva’s growth was referenced in comparison Conference cadence: About one conference per year - Richard noted DFIN’s relatively light public-markets marketing presence Float/size: Under $2 billion market cap - Used to explain potential volatility and sensitivity to holders

Pivotal Quotes: "This company is way undervalued, whether you think SPACs have legs or not." — Andrew Walker: Introductory framing of the DFIN pitch and why the stock stood out earlier in the year "We are not going to do deals, right? We are going to focus on our software offerings." — Richard Sosa: Richard describing management’s strategic pivot away from empire-building and toward software investment "The only company on the capital market side, they're the only company that can service the issuer, like full stop." — Richard Sosa: Explaining DFIN’s broad utility across private-to-public transitions, filings, and transaction workflows

Implications: DFIN may be transitioning from a misunderstood spin-off into a durable capital-markets/software compounder. If software growth and cash generation persist, the stock could rerate further; if transaction activity cools, valuation still looks supported by cash flow and buybacks.